Glossary: What is Redraw?
This article is part of our Glossary Series, helping you understand some of the many acronyms you may have come across within the mortgage industry. If you come across a term you don’t understand, get in touch and we will add it to our list of definitions.
Redraw lets you access extra repayments you have made on your loan. In an emergency, access to this extra cash can be a live-saver.
Similar to how a savings account works, you can also save within your mortgage account simply by making payments over and above your minimum monthly requirement.
You may find that some months you have a little extra leftover, or you may just prefer to pay additional every month. This has two advantages.
By paying extra into your loan, you are building up savings that can be “redrawn” for life’s unexpected costs, while also reducing the interest charged over the life of the loan.
For example, you may need to repair your car, or perhaps the kids need braces; with many unforeseen life events the option of redraw can help you.
An example of redraw
Your minimum monthly repayment is $1,000 but you can afford to pay $1,200.
The extra $200 per month adds up to $2,400 for a year.
This $2,400 may be able to be redrawn if needed. If not, you are saving interest on your loan.
As you can see, your home loan can be a great place to keep your savings. Although you can earn interest through a savings account, by putting your savings into your home loan instead you get the benefit of reducing your loan’s interest while also growing that important nest egg for life’s unexpected events.
Many of my clients want to know the difference between an offset account and the redraw facility. Both options can save you interest on your home loan, but there are important differences to be aware of.
To put it simply, an offset account is a separate account to your home loan and works much like an everyday transaction account as the savings can be accessed at any time.
A redraw facility isn’t a separate account as such as it operates within your home loan, so the money isn’t as easily accessible. For some people this can be a benefit as it may reduce the temptation to spend.
In summary; instead of saving in a savings account while paying off your home loan, consider saving within the home loan itself which can reduce your interest while also offering access to those extra funds only when you critically need it.
