If you're a homeowner in Brisbane, you've probably heard the term "redraw facility" tossed around. But what does it really mean, and how can it benefit you? In simple terms, A redraw facility lets you access extra funds paid towards your home loan, offering flexibility to manage your finances when needed.
With 20 years of experience in the mortgage industry, we at Zest Mortgage Solutions have seen how this feature can make a real difference for our clients. In this guide, we'll walk you through everything you need to know about redraw facilities, from how they work to the pros and cons, and we'll even throw in a real-life case study from Brisbane.
The Brisbane Property Market in 2024: What You Need to Know
As of 2024, Brisbane's property market remains one of the most dynamic in Australia. According to the latest data from CoreLogic, the median house price in Brisbane sits at approximately $850,000. With a strong demand for property, particularly in the outer suburbs, the market continues to grow, albeit at a slightly slower pace compared to the boom of the previous years.
While interest rates have seen some fluctuations, variable home loans remain popular among Brisbane homeowners, offering the flexibility that many need in a volatile market. The current average variable interest rate for home loans in Brisbane hovers around 6.35%, with some variability depending on the lender and the borrower's financial situation.
What Is a Redraw Facility?
A redraw facility is a feature attached to some home loans that allows you to withdraw any extra repayments you've made over the required minimum repayment. Essentially, it's a way to access the funds you’ve used to pay down your loan more quickly than required.
Here's a simple breakdown of how it works:
Let’s say you have a home loan with a principal balance of $400,000 and a variable interest rate of 6.35%.
- Minimum Monthly Repayment: Your minimum repayment might be around $2,400 per month.
- Extra Repayments: You decide to pay an additional $500 each month on top of your minimum repayment.
Calculation Over One Year:
- Total Repayments Made: Over 12 months, you pay $28,800 in minimum repayments (12 x $2,400).
- Total Extra Repayments: Over the same period, your extra payments add up to $6,000 (12 x $500).
With the redraw facility, the $6,000 in extra repayments becomes your redraw balance. This means you can withdraw up to $6,000 if needed, giving you quick access to funds without having to apply for a new loan.
Key Points to Remember:
- The more you pay above your minimum repayment, the more you have available in your redraw balance.
- While withdrawing from your redraw balance provides flexibility, it’s important to remember that it increases your loan balance and potentially the interest you’ll pay over time.
- Not all home loans come with a redraw facility, and there can be restrictions on how much you can withdraw and how often. It’s also worth noting that the redraw facility is generally available with variable rate loans rather than fixed-term loans.
Pros and Cons of a Redraw Facility
Before deciding if a redraw facility is right for you, it’s important to weigh the benefits and drawbacks. Understanding both sides can help you make a more informed decision.
Pros:
- Financial Flexibility: A redraw facility allows you to access extra funds when you need them, without taking out a separate loan.
- Interest Savings: By making extra repayments, you reduce your outstanding loan balance, which can lower the amount of interest you pay over time.
- No Need for Separate Loans: If an unexpected expense arises, you can use your redraw balance instead of resorting to high-interest credit cards or personal loans.
Cons:
- Potential Fees: Some lenders charge fees each time you make a withdrawal from your redraw balance, which can add up.
- Redraw Limits: There may be restrictions on how much and how often you can redraw, which could limit access to your funds.
- Impact on Loan Term: Withdrawing funds increases your loan balance, which could extend your loan term and result in more interest paid in the long run.
Case Study: How a Redraw Facility Helped a Brisbane Family
Let’s look at a real-life example. The Johnsons, a Brisbane-based family, had been diligently making extra home loan repayments for three years. They had accumulated a redraw balance of $50,000.
However, when their kitchen needed an urgent renovation, they were able to use their redraw facility to access these funds without taking out a personal loan or using a high-interest credit card.
By opting for the redraw facility, the Johnsons saved on potential interest costs and avoided the hassle of applying for a separate loan. Plus, they could continue to make their regular repayments, knowing they had the flexibility to access extra funds if needed.
How to Use a Redraw Facility Wisely
Using a redraw facility can offer significant financial flexibility, but it's crucial to manage it carefully. By following some smart strategies, you can make the most of this loan feature without compromising your long-term financial health.
Here are six tips for using your redraw facility wisely.
1. Prioritise Additional Repayments to Build Your Redraw Balance
Make extra or additional repayments whenever possible. This not only reduces your outstanding balance but also increases the balance in redraw available for future use. Over time, these excess repayments can provide a valuable safety net of extra cash for emergencies or opportunities.
2. Only Withdraw Spare Funds When Necessary
While the loan redraw facility offers instant access to your extra money, it’s essential to treat these spare funds as a last resort. Avoid withdrawing unless you have a pressing need. Remember, each loan redraw can potentially extend your rate term and increase your loan rates over time.
3. Be Mindful of Withdrawal Fees and Potential Break Costs
Check if your lender charges withdrawal fees for accessing your loan redraw balance. Also, understand any potential break costs associated with your type of loan. Different loan products might have varying fee structures, especially variable loans versus fixed-rate loans.
4. Avoid Using Your Redraw Facility for Everyday Transactions
It's tempting to dip into your redraw balance for everyday spending or everyday transactions, but doing so can undermine your financial goals. Treat the redraw facility like a separate transaction from your regular transactions to ensure it’s used only for significant needs or opportunities like a future investment.
5. Understand Your Eligibility Criteria and Rate Period
Not every loan is an eligible home loan for a redraw facility. Make sure you meet the eligibility criteria and understand how your rate period or rate term might affect your redraw options. Loan specialists can help clarify the details, ensuring you don’t inadvertently face higher costs or extended loan terms.
6. Seek Taxation Advice Before Large Withdrawals
If you’re considering withdrawing a large sum from your redraw balance, seek taxation advice to understand any potential implications. This is especially important if you're using the funds for investment purposes or if your financial circumstances have changed.
By following these strategies, you can effectively manage your loan redraw facility and maximise its benefits, whether you’re using it for extra loan repayments, additional funds, or a future investment. Always consider the broader impact on your loan type and outstanding balance, and consult with loan specialists for the best advice tailored to your situation.
Chat with Zest Mortgage Solutions
Thinking about a redraw facility? Zest Mortgage Solutions can help you understand your loan options and find the best solution for your needs. Contact us today or give us a call at (07) 3461 6499 to speak with one of our loan experts.
FAQs
What is the difference between a redraw facility and an offset account?
A redraw facility allows you to access extra repayments made on your home loan, while an offset account is a separate account that reduces the interest you pay on your loan.
Are there any fees for using a redraw facility?
Some lenders charge fees for using a redraw facility, so it’s important to check with your loan provider.
Can I use a redraw facility with a fixed-rate loan?
Redraw facilities are typically only available with variable rate loans, though some fixed loans may offer this feature with restrictions.
How often can I redraw funds?
The frequency of redraws can vary depending on your lender’s terms. Some may allow unlimited redraws, while others may have restrictions.
Will using my redraw facility affect my loan term?
Yes, withdrawing funds can increase your loan balance and potentially extend your loan term if you don't adjust your repayments.
Is there a minimum amount I can redraw?
Many lenders have a minimum redraw amount, which could be anywhere from $500 to $2,000, depending on your loan agreement.
Should I seek professional advice before using a redraw facility?
Yes, it’s a good idea to seek financial advice to ensure that using a redraw facility aligns with your financial goals.
Final Thoughts
A redraw facility offers flexibility and potential savings, helping you make the most of your extra repayments. Whether you're planning for future investments or managing everyday costs, it can be a valuable financial tool.
If you're considering a redraw facility or exploring other loan options, Zest Mortgage Solutions is here to help. With 20 years of experience, we provide tailored advice to fit your financial goals. Contact us or call (07) 3461 6499 today to find the best solution for you.
