When taking a home loan, most people focus only on interest rates and monthly repayments. But many home loans also come with special features that can help you save money in the long run. One such important feature is the redraw facility.
A redraw facility allows you to take out extra money that you have already paid into your home loan. This feature can be helpful, but it also has some drawbacks. That is why it is important to clearly understand the redraw facility pros and cons before choosing a home loan.
In this blog, we will explain:
- What a redraw facility is
- How it works
- Its advantages and disadvantages
- Real-life examples with dollar calculations
- When a redraw facility is a good choice
- Important tips before using it
This guide is written in simple and easy language, making it useful for informative readers who want clarity without complex terms.
What Is a Redraw Facility?
A redraw facility is a home loan feature that allows borrowers to withdraw extra repayments they have made on their mortgage.
When you pay more than your required monthly loan repayment, the extra amount goes directly toward reducing your loan balance. With a redraw facility, you can later access that extra money if needed.
Simple Example
- Required monthly repayment: $1,500
- You pay: $2,000
- Extra repayment: $500
That extra $500 becomes available in your redraw account (subject to lender rules).
How Does a Redraw Facility Work?
A redraw facility works by reducing your loan principal whenever you make extra repayments. Since interest is calculated daily on the remaining loan balance, reducing the principal helps lower your interest cost.
Step-by-Step Working
- You make extra repayments on your home loan.
- The loan balance reduces.
- Interest is calculated on a lower balance.
- You can withdraw (redraw) the extra amount later if needed.
Example With Calculation (In Dollars)
Let’s understand this with a simple calculation.
Loan Details
- Loan amount: $300,000
- Interest rate: 6% per year
- Loan term: 25 years
Without Extra Repayments
- Monthly interest (approx):
$300,000 × 6% ÷ 12 = $1,500
With Extra Repayments
- You pay an extra $5,000 in the first year.
- New loan balance: $295,000
New Monthly Interest
- $295,000 × 6% ÷ 12 = $1,475
Monthly Savings
- $1,500 − $1,475 = $25 per month
Yearly Savings
- $25 × 12 = $300 per year
Over many years, these savings become very significant.
Pros of a Redraw Facility
Let’s now understand the advantages of a redraw facility in detail.
1. Helps You Save on Interest
The biggest benefit of a redraw facility is interest savings. Since extra repayments reduce the loan balance, interest is charged on a smaller amount.
Example
If you make extra repayments of $10,000 early in your loan:
- You reduce interest for the entire loan period.
- This can save thousands of dollars over 20–25 years.
2. Helps Pay Off the Loan Faster
By making regular extra repayments, you can shorten your loan tenure.
Example
- Loan term: 25 years
- Extra payment: $200 per month
This small amount can reduce your loan term by 2–4 years, depending on the interest rate.
3. Emergency Access to Funds
A redraw facility acts like a backup fund.
You can redraw money for:
- Medical emergencies
- Home repairs
- Temporary income loss
- Education expenses
This reduces the need for high-interest personal loans or credit cards.
4. Encourages Better Saving Habits
Money placed in a redraw account is not easily accessible like a savings account. This helps people avoid unnecessary spending and encourages disciplined saving.
5. Usually Lower Fees Than Offset Accounts
In many cases:
- Redraw facilities have low or no monthly fees
- Offset accounts may charge annual or account fees
This makes redraw facilities attractive for cost-conscious borrowers.
6. Simple to Manage
A redraw facility is usually linked directly to your home loan. You do not need to manage multiple accounts, which makes it simple for beginners.
Cons of a Redraw Facility
While a redraw facility has many benefits, it also has important disadvantages that you must understand.
1. Limited Access to Your Money
Unlike a normal bank account:
- Redraw requests may take 1–3 business days
- Some lenders set minimum redraw amounts (e.g., $500 or $1,000)
This can be a problem during emergencies.
2. Redraw Is Not Guaranteed
The money you see in redraw is not legally yours like savings. Banks may:
- Reduce redraw limits
- Freeze redraw access
- Remove the feature during financial stress
This risk is often overlooked by borrowers.
3. Fees on Redraw Transactions
Some lenders charge:
- Redraw fees per transaction
- Limits on the number of redraws per year
These costs can reduce overall savings.
4. Tax Complications (For Future Investment Use)
If you later turn your home into a rental property:
- Redrawing money for personal use can affect tax deductions
- Interest on redrawn amounts may not be tax-deductible
This makes redraw less suitable for future investors.
5. Not Ideal for Fixed-Rate Loans
Many fixed-rate home loans:
- Limit extra repayments
- Do not allow redraw at all
Always check loan conditions carefully.
6. Can Increase Debt Again
Redrawing funds increases your loan balance again. This may:
- Extend your loan term
- Increase total interest if redraws are frequent
Redraw Facility vs Offset Account (Quick Comparison)
| Feature | Redraw Facility | Offset Account |
| Access to money | Limited | Instant |
| Interest saving | Yes | Yes |
| Fees | Usually low | Often higher |
| Tax flexibility | Lower | Better |
| Spending discipline | Higher | Lower |
This comparison helps readers decide which option fits their financial habits.
When a Redraw Facility Is a Good Choice
A redraw facility is suitable if:
- You want to pay off your loan faster
- You don’t need instant access to money
- You prefer fewer fees
- You are disciplined with finances
- Your loan is mainly for living, not investing
When a Redraw Facility May Not Be Ideal
It may not be the best choice if:
- You need frequent access to cash
- You plan to convert the home into an investment property
- You want full control over your savings
- You have unstable income and may need instant funds
Practical Redraw Example With Long-Term Calculation
Loan Details
- Loan: $400,000
- Interest rate: 6.5%
- Term: 25 years
Extra Repayment
- Extra: $300 per month
- Yearly extra: $3,600
After 5 Years
- Extra paid: $18,000
- Estimated interest saved: $25,000–$30,000
- Loan term reduced by around 3 years
This shows how powerful consistent extra repayments can be.
Tips to Use a Redraw Facility Smartly
- Keep a separate emergency fund if possible
- Check redraw limits and fees
- Avoid frequent withdrawals
- Read loan terms carefully
- Track how redraw affects your loan balance
- Think long-term, not short-term
Also Read: Best Investment Accounts for Beginners: A Complete Guide
Conclusion: Redraw Facility Pros And Cons
Understanding the redraw facility pros and cons is very important before choosing a home loan. A redraw facility can help you save interest, pay off your loan faster, and manage emergencies. However, it also comes with limitations like restricted access, possible fees, and tax complications.
If you are disciplined, focused on reducing debt, and don’t need instant access to funds, a redraw facility can be a powerful financial tool. But if flexibility and liquidity matter more to you, exploring other options may be better.
Always match the feature with your financial goals, lifestyle, and long-term plans before making a decision.
