Refinancing is becoming an increasingly more popular solution for Australians looking to save some money on their home loan. However, within the process of refinancing, there are several elements of your previous home loan to consider. Namely, what happens to your redraw facility when you choose to refinance.
What happens to my redraw facility when I refinance?
In the most simplistic explanation, the balance stored in your redraw facility is transferred to your new loan when you refinance. You will still have access to the funds you have accumulated in this facility, but now you might have to pay a slightly higher interest rate on the amount that you have drawn down on.
Luckily, most lenders will allow you to keep the redraw facility you already had if you choose to change to their business. That means all the extra repayments you’ve made into the redraw facility will still be accessible to you, granting you some extra cash that can be put to good use.
What is a redraw facility?
A redraw facility is a feature of your home loan that grants borrowers the ability to make additional payments on their loan, which becomes a pool you can withdraw funds from at any point. Since most home loans only require a set amount for minimum monthly repayments, you can calculate and set how many times you would like to make additional repayments based on your financial situation. The available balance in your redraw facility can quickly add up with some time and dedication.
How does a redraw facility work?
By making extra repayments on your home loan, you can begin to reduce your overall home loan sooner, as well as your mortgage repayments. Whenever you are suddenly in need of some extra cash, however, you can choose to access, or rather, ‘redraw’ these funds. That is how a redraw facility works.
Otherwise, keeping the funds you have placed into your home loan in redraw facilities will pay off the balance much faster through the extra repayments. By the end of the loan term, both your available redraw balance and home loan balance should be zero, as the funds you deposit into the redraw facility reduces over the course of the loan.
It should be noted that redraw facilities are not usually available for construction loans, business banking, bridging, or SMSF loans, and not all lenders grant it for a fixed rate home loan. You will find most redraw facilities are for variable rate home loans, which is an important fact to remember for looking into a new home loan.
How much can I redraw?
When it comes to redrawing, some home loans may set maximum redraw amounts for your facility, regardless of how many repayments you’ve made. Most of the time, however, you can redraw the total sum of the additional repayments you’ve made just before your next scheduled repayment, minus one month’s amount.
To get a clearer idea, if you made extra repayments of $150 monthly, and chose to redraw after 12 months, you will be able to $1,800, minus one month’s repayment.
Benefits of redraw
When you choose to set up a redraw facility, there are several benefits that quickly become apparent. These include:
Chipping away at your home loan balance
Extra repayments are a vital step in paying off your mortgage sooner than usual. Reducing your home loan balance also allows for you to lower the monthly repayments you make.
Reduced charged interest rate
When you make extra repayments on your home loan, you can reduce the length of your loan so long as you do not make any withdrawals. This also has the added benefit of reducing the amount of interest rate you are charged.
Accessing cash whenever needed
Instead of taking out a personal loan or a credit card, or even dipping into your savings account for emergency funds, you can choose to withdraw money from your redraw facility. There is no stipulation on what these funds must be used for, and they would otherwise be reducing your loan repayments, so there is no limit on what you can put these funds towards.
Taking a repayment holiday
In the case of you building up enough extra repayments, you can take a holiday from your scheduled mortgage repayments, instead directing the additional cash towards your monthly repayments. The breathing room this gives homeowners can be greatly beneficial.
What is refinancing?
Refinancing is the process of changing from your current home loan to a new one. It is done with the intent of finding a better interest rate or loan term, and can be done with either a new lender or your current one. The new home loan can be a fixed rate home loan or a variable rate home loan, and the options available usually boast a competitive interest rate that allows you to pay less interest, or a home loan feature of making extra home loan repayments.
By refinancing, you adapt your home loan to better suit your current life circumstances. The process ultimately gives you more control and flexibility with your money, and you can even save money by finding a better alternative to your current home loan.
What is an offset account?
An offset account is an everyday bank account where you can deposit your salary and savings alike. It is known as an offset account due to the fact that the balance of this bank account is offset against the amount owing on your home loan.
That is, you will have full access to whatever money you have stored in your offset account, but only the difference between this amount and what you owe on your home loan will be charged interest. So if you have $300,000 in your home loan, and $50,000 in your offset account, you will be charged interest on the differential loan balance of $250,000. To learn more, have a look at our offset calculator.Â
An offset account is appealing depending on the amount of money you have deposited into it, and the type of account you have chosen.
Redraw vs offset: Understanding the difference
When refinancing, it can be difficult to determine the difference between a redraw facility and an offset account, as well as which option best suits your plans to save money. The reason why you are looking to open a redraw facility or an offset account can best determine which one works for your financial situation, but you can always seek out financial advice to guide your choices.
- A redraw facility is a loan feature of your home loan, making it under the control of your bank.
- An offset account is linked to your home loan account and is a transaction account, meaning the bank has no right to approach those funds.
- When extracting money from a redraw facility, it cannot be done at an ATM or transacted using a debit card, unlike an offset account.
- The fact that an offset account is not a feature of your home loan means that you can deposit a wide variety of financial sources into it, rather than just through monthly repayments like in a redraw facility. This can include your employer directly depositing your salary into your offset account.
- Â Redraw facilities work on lowering your overall home loan balance through making more frequent repayment amounts.
- An offset account is mainly intended to ‘offset’ your interest, and thus can only lower interest rates when you have built up a significant amount of money in the account.
- If you decide to rent out your home in the future, what feature you have chosen can have implications for your tax. The interest charged on your home loan may be tax deductible if you choose to use your home as an investment property, but if you have a redraw facility you may not be able to claim any part of your loan you have redrawn from for non-investment purposes.
- If you withdraw from your offset account, however, it will not affect the tax deductibility of interest charged on your home loan.
Should I choose offset or redraw if I’m refinancing?
Truthfully, there is no right answer as to whether or not you should choose to offset or redraw if you are looking to refinance. It is important to look at the pros and cons of both features, especially in what will happen to them if you do choose to refinance; whether that is with the same lender, or with a new one.
This is particularly important to consider if you are looking at refinancing with an offset account. This is because refinancing with new lenders may require you to open a new offset account with them. You most likely will be able to keep your initial account as a general savings account, but starting from scratch when refinancing can be disenchanting to some.
Otherwise, you need to carefully weigh whether or not you want this part of your finances to be controlled by the bank, or what part of your home loan features you wish to reduce; interest rate, monthly repayments, or total balance. It all comes down to what you are looking to get out of your finances in the future, and what kind of access you want to them.
What happens to my redraw when my loan is paid off?
In most cases of a home loan being paid off, the lender will cancel the redraw facility. However, some lenders may choose to keep the facility open so long as you accept paying charges for the service.
Disclaimer: This article is not intended as legal, financial or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature you should seek advice from a qualified and registered Australian legal practitioner or financial or investment advisor. Â
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Understanding more about redraw facilities, offset accounts and refinancing
Can the bank take my redraw?
When it comes to Australian banks, your redraw cannot be taken without your explicit consent as they are a part of your home loan balance. Despite this, in some instances, a bank may request a repayment of your redraw. This is likely to happen if you have failed to make loan repayments, or have defaulted on your home loan.
Why is my redraw amount reduced?
While it may seem like your available redraw amount has been reduced, it is in fact in the middle of a fluctuation. Since this amount is based on the difference between your home loan balance and scheduled limit, and interest is charged at the end of the month, your available redraw may sometimes appear like it is reducing. This is only a temporary reduction, however, as your next repayment will increase your redraw amount once again.
How do I get money from my redraw?
Unlike an offset account, which can be withdrawn from an ATM, you will need to directly contact your bank and request a redraw. After the request is processed, the bank will send the funds to you. This may take a few days.
Can I use my redraw to pay my mortgage?
Yes, you can use your redraw facility to make payments towards your mortgage. Your lender may charge fees for this service, however, so always check the terms and conditions before beginning payments.
If you have any further questions on the process of refinancing with a redraw facility, you can contact Homestar Finance on 1300 231 948, or reach out to one of our home loan specialists.
