Redraw facilities: the what, why and how

Redraw lets you access extra principal repayments you’ve made on your loan.^disclaimer This could come in handy if you need some extra cash down the track. So how does it work?

Once you’ve settled into the rhythm of paying off your first mortgage, you might want to make your regular repayments higher than the minimum. Or make one-off additional payments from time to time.  By putting in a little extra, you could pay off your home loan sooner by reducing the interest charged over the life of the loan.

But sometimes life can throw an expensive curveball. Your car might decide to pack it in. Maybe an unexpected bill arrives. Or perhaps you’re just in desperate need of a holiday. This is where a redraw facility could be helpful.

If you’ve been paying extra into your home loan, a redraw facility lets you take back or ‘redraw’ those extra repayments to use as you wish.

How does a redraw facility work?

Here’s an example.

• Say the minimum monthly repayment on your home loan is $1,000.
• You decide to pay an extra $100 a month – adding up to $1,200 in extra repayments in one year. These extra repayments have decreased your loan balance by $1,200. 
• While you have an available redraw balance, this will also reduce the amount of interest costs payable each month as compared to the interest costs payable were you not to have an available redraw balance.
• This extra $1,200 may be available for you to redraw at a later date, should you meet the relevant eligibility criteria.
• If you want to redraw these extra funds, you can make a redraw request and the funds will be placed into an ANZ transaction account for you to use as you wish.
• If you redraw $500 from the extra $1,200 in repayments you’ve previously made, this will:
  •  Reduce your available redraw balance to $700;
  • Increase your loan balance by $500; and
  • Increase the monthly interest costs of your loan (although you would still be paying less interest costs than if you had no available redraw balance).

Important Note:

When you close out your loan, you will no longer have the ability to redraw the extra repayments you’ve previously made. This is because the extra repayments will be factored in to the calculation of paying off your loan balance.

For example, if your loan amount was $200,000, and you had $50,000 in redraw, your current loan balance would be $150,000. The amount required to pay off your loan would be $150,000, with the $50,000 redraw amount paying off the remainder of the outstanding loan amount. Whereas, if you were to redraw the $50,000 prior to closing out your loan, you would be required to pay $200,000 in full to pay off the loan in this scenario.

How to redraw money

It’s usually pretty easy to redraw money on an eligible home loan. While every lender may have different options, most will let you request redraw via online banking, by making a phone call, or by visiting a branch.

Different lenders have different minimum and maximum redraw amounts. At ANZ, there is no minimum amount for eligible home loans. The maximum depends on how much extra you’ve repaid on your home loan.

Redraw facilities vs a savings account

Redraw facilities can be an effective place to keep your savings. But instead of earning interest as you would in a savings account, you’re reducing the amount of interest you pay on your home loan.

This may work out better in the long run. Generally the interest you’ll save by having your money in redraw will be more than you’d earn from keeping the same amount in a savings account.

Redraw vs offset accounts

Offset accounts and redraw facilities both have the potential to save you interest on your home loan, but there are important differences.

An offset account works much like an everyday transaction account. You can withdraw money at ATMs and buy things using a debit card.

A redraw isn’t an account as such, but rather a facility attached to your home loan. So it doesn’t give you the flexibility to access money in the same way that an offset account can. For some people this can be a benefit as it may reduce the temptation to spend.

You can find out more by reading our article on offset accounts. Or if you’ve already done that, we suggest reading our article the looks more closely at the differences between offset accounts and redraw facilities.

To sum up

• A redraw facility lets you access extra repayments you’ve made on your home loan.
• Maintaining an available redraw balance can help reduce interest on your home loan.
• Different lenders have different ways to redraw and different rules on the frequency and the amounts.