What is a Redraw Facility?
A redraw facility is a feature offered by some lenders that allows borrowers to access any additional repayments they have made on their home loan. When you make regular repayments on your loan, you gradually reduce the principal amount owed. In some cases, borrowers may choose to make extra payments above the required minimum repayments to pay off their loan faster or reduce the interest costs.
A redraw facility enables borrowers to access these additional funds if they need them in the future. It essentially acts as a savings account linked to the home loan, allowing borrowers to deposit extra funds into the loan account and withdraw them when necessary.
By utilising the redraw facility, borrowers can have the flexibility to access their extra repayments for various purposes, such as home renovations, unexpected expenses, or even as a source of emergency funds.
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Who is Eligible for the Redraw Facility?
Eligibility for a redraw facility depends on the lender and the specific loan product. Generally, borrowers who meet the following criteria may be eligible for a redraw facility:
- Home loan borrowers: Redraw facilities are typically available to borrowers who have taken out a home loan. These loans can be for various purposes, such as purchasing a property or refinancing an existing mortgage.
- Loan repayment history: In most cases, borrowers need to have a good repayment history on their home loan. This means consistently making repayments on time and not defaulting on the loan.
- Extra repayments: To utilise the redraw facility, borrowers need to have made additional repayments on top of their regular minimum repayments. These extra repayments can be voluntary contributions made to reduce the principal amount owed or pay off the loan faster.
- Loan-to-value ratio (LVR): Lenders may consider the loan-to-value ratio when determining eligibility for a redraw facility. LVR (loan to value ratio) is the ratio of the loan amount to the appraised value of the property. Some lenders may have specific LVR requirements to access the redraw facility.
- Loan product terms: The availability and terms of the redraw facility will be outlined in the loan product documentation. Borrowers should review these terms and conditions to understand any specific eligibility criteria set by the lender.
How Does a Redraw Facility Work?
A redraw facility works by allowing borrowers to access the additional repayments they have made on their home loan. Here’s how it typically works:
Repayment Allocation
When you make a regular repayment on your home loan, the lender first allocates the funds to cover any interest charges that have accrued. The remaining amount, known as the principal repayment, goes towards reducing the outstanding loan balance.
Redraw Balance
If you have made extra repayments on your loan, the lender adds the surplus funds to your redraw balance. This balance represents the total amount of additional repayments you have made above the required minimum repayments.
Accessing Funds
You can access the funds in your redraw balance when needed. This can typically be done through online banking, a mobile app, or by contacting your lender directly. You can withdraw the funds up to the available balance in your redraw account.
Flexibility
The redraw facility offers flexibility in managing your finances. You can use the funds for various purposes, such as home improvements, emergencies, or even as a temporary source of liquidity.
Keep in mind that some lenders may impose minimum or maximum redraw amounts, and there may be fees associated with each redraw transaction.
Impact on Loan Term and Interest
When you make a redraw, it may affect your loan term and the amount of interest you pay. Withdrawing funds from your redraw balance effectively increases your outstanding loan balance, which could extend the loan term.
Additionally, the interest calculations may be based on the new, higher balance.
How to Use a Redraw Facility to Save Money on Your Mortgage
One of the best ways to use a redraw facility is to save money on your mortgage interest payments.
To do this, you can make extra repayments on your home loan whenever you have the extra money. These extra repayments will be used to reduce your principal balance, which will lower your interest payments.
For example, if you have a $500,000 home loan with an interest rate of 4%, you will pay around $20,000 in interest over the first five years. If you make an extra $100 per month repayment, you will save around $3,000 in interest over the same period.
How to Use a Redraw Facility for Emergencies
Using a redraw facility to save money on your mortgage is a smart financial strategy. Here’s how you can effectively utilise the redraw facility to reduce your interest payments:
- Make extra repayments: Whenever you have additional funds available, consider making extra repayments towards your home loan. These extra repayments go directly towards reducing the principal balance of your loan. By reducing the principal, you decrease the amount on which interest is calculated.
- Regularly contribute extra funds: To maximise the benefits of the redraw facility, aim to make extra repayments consistently over time. This can be achieved by setting up a regular schedule or contributing whenever you have surplus funds, such as bonuses, tax refunds, or savings from reduced expenses.
- Calculate potential savings: Use mortgage calculators or consult with your lender to estimate the potential savings from making extra repayments. By inputting different scenarios and amounts, you can see how additional contributions can reduce the interest paid over the loan term.
- Monitor your redraw balance: Keep track of your redraw balance, which represents the total amount of additional repayments you have made. As your redraw balance increases, so does the potential for reducing your interest payments.
- Reinvest interest savings: When you save on interest payments through extra repayments, consider reinvesting those savings back into your home loan. By making additional repayments beyond the required minimum, you can accelerate your debt reduction and further reduce the overall interest paid over the life of the loan.
- Regularly review your strategy: As your financial situation evolves, periodically reassess your strategy for making extra repayments and utilising the redraw facility. This will ensure that you are optimising your savings and staying on track to pay off your loan sooner.
Tips for Using a Redraw Facility
Here are a few tips for using a redraw facility:
- Understand the terms and conditions: Familiarise yourself with the specifics of your redraw facility, including fees and restrictions, to make informed decisions.
- Use redraw for emergencies or mortgage interest savings: Utilise the facility responsibly, reserving withdrawals for unforeseen circumstances or to reduce interest payments on your home loan.
- Keep track of your redraw balance: Stay aware of the available funds in your redraw account and ensure timely repayment of any withdrawn amounts.
- Budget and plan your extra repayments: Create a financial plan to determine the amount you can comfortably contribute towards your mortgage beyond the minimum repayments.
- Prioritise paying off high-interest debt: If you have other debts with higher interest rates, consider tackling those first to maximise long-term savings.
- Maintain a separate emergency fund: Establish a dedicated fund for unexpected expenses to avoid depleting your redraw balance.
- Stay informed about any changes from your lender: Keep in touch with your lender to stay updated on any adjustments or updates to your redraw facility.
- Regularly review your financial situation and goals: Periodically assess your strategy to ensure it aligns with your changing circumstances and objectives.
- Seek professional advice if needed: Consult a financial advisor or mortgage specialist for personalised guidance based on your specific needs and circumstances.
What Should Australian Expats Look Out For?
Australian expats should consider the following factors and take appropriate actions:
- Tax implications and residency status: Understand the tax obligations in both Australia and your country of residence, including residency rules, foreign income tax offsets, and potential tax benefits or implications.
- Currency exchange rates: Monitor currency exchange rates and explore options for international money transfers to mitigate the impact of currency fluctuations when transferring funds between countries.
- Retirement planning and superannuation: Evaluate the impact of your expat status on retirement planning, including superannuation eligibility, retirement schemes in your country of residence, and seek professional financial advice to optimise long-term retirement goals.
- Banking and financial services: Review banking arrangements, online banking availability, international transaction fees, and access to funds while abroad, as some banks may restrict or limit services for expats.
- Legal and compliance considerations: Familiarise yourself with local laws and regulations in your country of residence, including visa requirements, work permits, residency restrictions, and ensure compliance to avoid legal issues or penalties. Seek professional advice to address legal and estate planning needs, insurance coverage, and financial matters specific to your circumstances.
What About Foreign Buyers?
For foreign buyers interested in purchasing property in Australia, here are 5 important factors to consider:
- Foreign investment regulations: Understand and comply with Australia’s foreign investment regulations, which may impose restrictions or require approval for certain types of property purchases by non-residents. Familiarise yourself with the rules regarding residential and commercial properties, vacant land, and agricultural land.
- Stamp duty and taxes: Determine the applicable stamp duty and taxes for foreign buyers, as these may vary depending on the state or territory where the property is located. Be aware of any additional surcharges or taxes that may apply specifically to foreign buyers.
- Financing options: Explore financing options available to foreign buyers, as some lenders may have specific requirements or limitations. Consider consulting with mortgage brokers or financial institutions experienced in catering to foreign buyers to understand the available loan products and eligibility criteria.
- Legal considerations: Engage a qualified solicitor or conveyancer familiar with property transactions involving foreign buyers. They can guide you through the legal process, ensure compliance with regulations, conduct due diligence, and assist with contract negotiations.
- Currency exchange and repatriation of funds: Factor in currency exchange rates and consider the most cost-effective and secure methods for transferring funds from your home country to Australia. Explore options such as foreign exchange providers or international money transfers to minimise costs and ensure smooth transactions.
Looking to Use a Redraw Facility?
A redraw facility can be a great way to save money on your mortgage interest payments, or to have access to cash in an emergency. By making extra repayments on your mortgage, you can reduce the principal balance and lower your interest payments. However, it’s crucial to fully understand the terms and conditions of the redraw facility, including any fees and restrictions.
If you’re an Australian expat interested in utilising a redraw facility or exploring mortgage options, we recommend speaking with our experienced expat mortgage brokers. They can provide personalised guidance, help you compare different redraw facilities, and assist you in finding the best solution tailored to your expat needs.
Take the first step towards optimising your mortgage and speak with our experts today.
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Frequently asked questions
Can you redraw on a fixed home loan?
Yes, you can redraw on a fixed home loan. However, you may be subject to a fee for doing so. The fee will vary depending on the lender.
How does redraw work?
When you make a repayment on your home loan, the money is first used to pay down the interest that you owe. Once the interest is paid, any remaining money is added to your redraw balance.
You can then access your redraw balance at any time, as long as you have enough money in your redraw balance to cover the withdrawal.
How to Use a Redraw Facility to Save Money on Your Mortgage?
One of the best ways to use a redraw facility is to save money on your mortgage interest payments.
To do this, you can make extra repayments on your home loan whenever you have the extra money. These extra repayments will be used to reduce your principal balance, which will lower your interest payments.
For example, if you have a $500,000 home loan with an interest rate of 4%, you will pay around $20,000 in interest over the first five years. If you make an extra $100 per month repayment, you will save around $3,000 in interest over the same period.
How to Use a Redraw Facility for Emergencies?
Another way to use a redraw facility is to have access to cash in an emergency. For example, if you need to pay for car repairs or medical expenses, you can use your redraw balance to cover the cost.
It’s important to note that you will still need to repay the money that you withdraw from your redraw balance. However, you will have more time to repay the money, as you will not have to make repayments until your redraw balance reaches zero.
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