- Redraw facilities let you make extra repayments on your home loan and access those funds later.
- Extra repayments lower your loan balance and interest costs.
- Access to redraw funds isn’t always guaranteed or instant, and is always subject to lender’s terms.
Paying extra into your home loan can save you tens of thousands of dollars in interest over the life of your loan. But what if you need that cash, perhaps for an emergency or for another significant expense like a wedding or a holiday?
That’s where redraw facilities can be useful. They offer flexibility, but they’re not without drawbacks, so read on to learn what redraw facilities are and whether they are right for you.
@savings.com.au What's a home loan redraw facility and how can it help you save thousands? Savings scribe Bernadette Lunas breaks it down. #ausfinance #savings #homeloans ♬ original sound - Savings.com.au
What is a redraw facility?
A redraw facility is a home loan feature that allows borrowers to make extra repayments on top of their minimum required home loan repayments and withdraw those funds if needed for another purpose.
Those extra repayments are applied directly to your loan balance, thereby reducing the amount you owe and consequently lowering the interest charged on your home loan.
How redraw facilities save you interest
Interest on a home loan is calculated based on your outstanding balance. So by making extra repayments, you reduce that balance, which means interest is charged on a smaller amount.
To give you a better picture:
You pay more than the minimum → Your loan balance drops → You pay less interest
Let’s look at this example:
If your mortgage repayments are $3,000 a month and you make an extra $500 repayment each month for 12 months, you would have $6,000 that reduces your loan balance and may be available to redraw.
Keep these points in mind:
- You can generally only redraw funds paid ahead of your scheduled loan balance.
- When you redraw funds, your loan balance increases again, which means interest costs rise accordingly.
By making extra repayments, you can also shorten the term of your loan.
See also: How to pay off your mortgage quickly
Savings.com.au’s two cents
If you have extra cash after you’ve made your regular loan repayments, a redraw facility can be a handy way to chip away at your home loan faster while keeping a financial buffer in reserve.
However, bear in mind that the money you put in it isn’t sitting in a savings account. It’s part of your loan and access is subject to your lender’s rules. It saves you interest but it doesn’t earn interest.
If you’re comfortable with those trade-offs, redraw can be a useful feature so long as you know exactly how and when you can use it.
Is access to cash in your redraw always guaranteed?
While redraw facilities sound like a win-win, one important point to consider is that access to your money in the redraw facility may not always be immediate or unrestricted.
Lenders can impose limitations on how much or how little you can deposit, redraw, or hold in your redraw account. They may also set out conditions on how many times you can access the funds.
Many lenders offer redraw facilities free as part of a home loan, though some charge for the privilege. This feature is most commonly available on variable loans, but some fixed rate loans may also allow limited extra repayments (e.g. $10,000 per year) and redraws.
Advantages of a redraw facility
Interest savings
Making extra repayments into your home loan redraw facility reduces your loan balance and will in turn cut down the amount of interest paid over the loan term, potentially saving you tens of thousands of dollars.
Emergency buffer
Out-of-the-blue expenses always seem to pop up at the worst time, whether it's a broken-down car or a broken leg. If you don't have emergency fund, a redraw facility can be a financial safety net in these situations.
Encourages disciplined saving
Funds in redraw aren’t as easily accessed as a savings account, and while this can be a drawback, it can help curb impulse spending.
Often included free of charge
Many lenders include a redraw facility at no extra cost when taking out a variable home loan with them. Always be sure to check.
While you're considering lenders, the table below offers some of the most competitive interest rates on the market.
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Extra Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
5.94% p.a. | 5.98% p.a. | $2,978 | Principal & Interest | Variable | $0 | $530 | 90% |
| Promoted | Disclosure | ||||||||||
5.89% p.a. | 5.80% p.a. | $2,962 | Principal & Interest | Variable | $0 | $0 | 80% |
| Promoted | Disclosure | ||||||||||
5.99% p.a. | 6.02% p.a. | $2,995 | Principal & Interest | Fixed | $0 | $0 | 60% |
| Promoted | Disclosure | ||||||||||
5.93% p.a. | 5.93% p.a. | $2,975 | Principal & Interest | Variable | $0 | $395 | 70% | Disclosure |
Disadvantages of a redraw facility
Restricted access
Withdrawals may be delayed (could take a day or two) or limited (the amount is capped for a certain period). Not all redraw facilities have same-day withdrawal, which can be less than ideal if you need the money immediately.
Fees
Some lenders charge redraw fees. Some may charge for each redraw while others once you hit a certain threshold in, say, a month.
Minimum or maximum limits
You may not be able to withdraw small or very large amounts.
Funds are part of the loan
The money in your redraw account sits within your mortgage, which means it is subject to lender terms. Your lender may restrict access under certain conditions, change the balance of your redraw amount, or alter any number of conditions associated with the loan.
Such a scenario affected some ME Bank customers in 2020 when the redraw balances were reduced due to changes in loan conditions. The bank was within its rights to make changes but agreed to review the cases of some borrowers after a backlash.
Redraw facility case study: Meet Ms Rhee and Mr Droar
Let’s see how a redraw facility works.
Ms Rhee has a 30-year mortgage with monthly repayments of $3,000. She’s been paying an extra $100 each month since she took out the loan 10 years ago. Over time, she’s built up $12,000 in extra repayments.
Ms Rhee then meets Mr Droar, they fall madly in love, and he proposes. Mr Droar has no money and plans to fund the wedding with a high-interest personal loan.
Ms Rhee loves him regardless and instead offers to pay for the wedding using the funds in her redraw facility. Her lender allows her to redraw the $12,000. Her loan balance then increases by $12,000, and interest is calculated on the higher balance going forward.
The two are married as Mr and Mrs Rhee-Droar, and they are able to start their wedded life without taking out a separate loan.
Tips for using a redraw facility effectively
A redraw facility can be a great way to save money on your home loan and help you out in a pinch. Here are a few ways to maximise its benefits:
Make extra repayments when you can
Making extra repayments, however small, can make a meaningful difference over time. Every dollar can help reduce the term of your loan and potentially save you thousands in interest costs.
Keep repayments steady even if rates fall
If your interest rate drops (say, the RBA lowers the cash rate and you are on a variable rate home loan), so too will your repayments. However, consider keeping your repayments at the same level to pay off your loan faster.
Use lump sums wisely
If you come into a large sum of money, like a tax return, bonus, or inheritance, put it in your redraw facility to reduce your interest. Just make sure the savings you’re making from using the facility aren’t outweighed by any fees the lender might charge you for parking or accessing your cash.
Remember it’s flexible
Making extra repayments doesn’t have to be a regular thing. You can make them as frequently or infrequently as you like, depending on your cash flow and your lender's conditions, of course.
Check out our calculator to see how much making extra repayments could save you in the long term.
How to access money in a redraw facility
Money in a redraw facility may be accessed in the same way as your cash in a savings account or an offset account. The methods vary by lenders, but the common ways include:
- Via the lender’s mobile app or online banking
- Transferring to a transaction account
- ATM withdrawals
- Over the phone
- At a branch
While access methods may be similar, redraw funds are typically less flexible than savings or offset accounts. Some lenders offer instant online redraws, while others may take a day or more to process.
What happens to redraw when the loan is paid off?
Once your home loan is fully paid off, your redraw disappears. And, yes, we are talking about the money in it.
Any money you have in redraw is automatically absorbed into paying off the loan.
For example, if you’ve got $20,000 to go on your loan and a handy $20,000 sitting in your redraw facility, it will go to paying your home loan and you cannot withdraw it as cash.
Now, you may be wondering, can I redraw just before the loan ends?
You may be allowed, but only if your lender allows redrawing at that stage, the loan account is still open, or the minimum balance rules are met.
Can you use your redraw to pay your mortgage?
Yes. You can generally use the money in your redraw facility to cover your home loan repayments. Here’s how it works in practice:
Option A: You redraw the funds, then make repayments
You withdraw the extra repayments you made from your redraw facility and use that money to make your regular mortgage repayments.
The result: Your loan balance increases when you redraw, then decreases again when the repayment is applied.
Option B: Automatic redraw-to-repayment (some lenders)
Some lenders allow repayments to be automatically covered by the funds in your redraw if you’re ahead on your loan.
The result: Your loan repayment is met but your redraw balance shrinks.
Important things to consider
Using redraw to pay your home loan doesn’t reduce your debt long-term since you’re effectively using money you already paid in advance.
Another thing to be aware of once you redraw funds is that your loan balance increases and interest is calculated on the higher amount.
While redraw can help with short-term cash flow, it may reduce your long-term interest savings and you may even incur fees or processing delays.
Is a redraw facility better than an offset account?
An offset account is essentially a transaction account linked to your home loan. The balance in it is offset against your home loan balance, reducing the interest charged. For example, if you had $50,000 in your offset account and a $600,000 loan, you would only be charged interest on $550,000.
Here are the key differences between an offset account and a redraw facility:
Feature | Redraw facility | Offset account |
Structure | Part of your home loan | Separate transaction account |
Funds | Considered loan repayments | Your own money |
Effect on interest | Reduces interest by lowering loan balance | Reduces interest by offsetting loan balance |
Access to funds | Subject to lender rules and processing times | Instant access (like a regular bank account) |
Interest earned | No | No |
Fees | Often free, but fees may apply | May come with higher fees |
Flexibility | Limited | High |
See also: Redraw vs Offset: Which is better?
Some home loans offer either a redraw facility or an offset account, with borrowers typically only being able to take advantage of one or the other.
Other home loans can have both, depending on the lender and loan type.
Offset accounts generally offer greater flexibility and clearer separation from the home loan, making them well-suited to borrowers who want easy access to their money.
Redraw facilities are part of the loan and can suit borrowers who want to save interest and build a buffer but don’t need day-to-day access to their extra funds.
The trade-off here is that home loans with offset accounts may come with a slightly higher interest rate or fees.
Frequently Asked Questions
No. Your minimum repayments usually stay the same. What changes is how much interest you pay and how quickly you can repay the loan, as the money in redraw lowers your outstanding balance and therefore the interest charged.
Access to your funds in redraw is subject to lender terms. While outright refusal is uncommon, lenders can impose limits under certain conditions.
Redraw funds are part of your loan and subject to lender terms. They’re not guaranteed in the same way as money in a standard bank account.
Neither is universally better. Both reduce interest charged; redraw offers structure while offset accounts provide greater flexibility and separation from the loan (though may come with higher rates or fees).