What is a redraw facility?

If flexibility is important to you, a redraw facility will be a convenient feature to provide you with access to your savings when necessary.

A redraw facility is a home loan feature that is attached to your mortgage and gives you the opportunity to make extra repayments on your home loan – which helps to reduce the interest costs.

You then have the option to 'redraw' the extra funds you have paid into your mortgage if the need arises - giving you the flexibility to access any 'buffer' you have built up.

However, keep in mind that some lenders have a minimum redraw amount and may also charge a fee per redraw.

Redraw facility vs offset account

Both the redraw facility and offset account are useful tools to pay down your home loan quicker - if used wisely. These two loan features act in a similar way by reducing the loan balance used to calculate the amount of interest payable, however there are significant differences.

Limitations may be imposed on a redraw facility in terms of the withdrawal amount, as well as the number of redraws allowed per year. You may be charged a fee for each redraw, and it could take a little time for the funds to come through. Compared to an offset account, this is much less flexible and accessible.

However this inflexibility could be used to the borrower's advantage if they are less disciplined savers. By making it more difficult and costly to access savings, the borrowers will be less tempted to withdraw from their savings unless absolutely necessary.

An offset account on the other hand is generally set up as an everyday transaction account, so depositing and withdrawing money is very straightforward. However, keep in mind that this convenience may come at a cost of higher interest rates or additional account keeping fees.

Generally speaking, a redraw facility is less suited for investment home loans, because of its potential tax implications.

It's worth doing the sums to see which one works better for you. Or better still, let a home loan expert crunch the numbers for you.

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