Making the most of your redraw facility
Redraw facilities are under-utilised - fact. Many don't realise that such a feature has the ability to save hundreds - no, thousands - over the lifetime of your home loan. It's common for first home buyers and refinancers to request an offset account, but is that really the most fruitful option? A redraw facility can help you out when you're in a bind and need some emergency funds, or it can act as a forced savings plan; with your money tucked away in your home loan, you can employ the "out of sight, out of mind" approach, whilst saving big bucks on interest.
Firstly, what exactly is a redraw facility?
This handy feature allows you to make extra repayments on your home loan, and withdraw these funds as you require them. The key benefit of this feature is that you are reducing the principle on which you are paying interest.
For example, if you put $5000 worth of extra repayments onto your $200,000 loan, you will now only pay interest on $195,000. While this may not seem like a huge difference, it certainly accumulates over time; on a 30 year loan term with an interest rate of $6 per cent, your $200,000 loan would be charged $23720 in interest over the first 2 years. By contrast, if you add an additional $5,000 in savings at the start of each year, you would be charged $22,829 over the first 2 years. That is a saving of $891 in interest. And the best part? If an expense arises, you have $10,000 in extra repayments that can be redrawn from the loan at any time, to be spent however you wish.
Pay off your loan faster.
In the below chart, you can see how extra repayments will allow these home owners, let's call them Steve and Sally, to pay off their mortgage in 18 years - 12 years faster than if they continue with just their minimum repayments. After paying $800 a week for 18 years, Steve and Sally pay approximately $300,000 in interest over the life of their $450,000 home loan. Sounds like a lot, right? Not when you compare it to the $800,000 in interest they would have paid had they continued their minimum repayments for 30 years! Of course, interest rates, loan structures and circumstances may change (in deed, the likelihood of the rate staying steady at 6% for 18 years is very slim) - but by paying more than the minimum each week, Steve and Sally have created a nice buffer to prepare for a rainy day, whilst saving bucket loads in interest.
Imagine at year 4, Sally falls pregnant. Having only been at her work for less than a year, she is not entitled to any maternity leave. The couple are left to cover their mortgage repayments, along with all the expenses associated with a newborn, on just Steve's salary. Luckily, as you can see above, they have already accumulated over $60,000 of extra repayments, sitting within their redraw. They use some of the money to refurbish their new nursery, and allow the funds in the redraw facility to cover their mortgage repayments for six months.
Steve and Sally thank their past selves for being proactive with their repayments, and they breeze through this period without any financial difficulty. The power of the redraw!
Redraw facility vs offset account
Both of these features achieve the same end (by saving you in interest), but each have their own benefits and drawbacks.
Many view offset accounts more favourably than the redraw facility, as the funds within are readily accessible. Unlike the redraw facility, you can have a debit card linked to your offset account, and you can perform your everyday purchases whilst the remainder saves interest. Many banks allow for multiple offset accounts to be attached to your loan, making it easy to divide your funds for different purposes, and create a coherent budget. Err on the side of caution when opting for this method; offset accounts generally come as part of a home loan package, and may have higher interest rates than your standard 'no frills' product.
While redraw facilities generally come standard, some banks may impose a minimum redraw requirement, or limit the number of times you can redraw. Regardless, this method is seen as a safer saving option to many, as the funds within are not readily available - you have to physically transfer them in order to spend them. You can also set your security preferences so that both parties on the loan have to authorise each redraw; hopefully with someone else's watchful eye, this will help to minimise impulsive and reckless spending!
If you like the accessibility of the offset account, but prefer the security of a redraw facility, why not get the best of both worlds and utilise both?!
Whichever way you look at it, redraw facilities are a fantastic tool to help you pay down your loan faster, whilst also allowing you to access your funds in trying times. To find out whether you have a redraw facility available on your loan (or if your considering refinancing to get one!) be sure to contact your local broker. Like Steve and Sally, your redraw facility could help you to pay off your loan a decade earlier than first planned!
Posted by My Local Broker
Disclaimer: The advice provided in this article is general advice only. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this advice you should consider the appropriateness of the advice, having regard to your own objectives, financial situation and needs. We encourage you to consult a finance professional before acting on any advice provided in this article or on this website.
