Redraw in Mortgage: Save Money on Your Mortgage Interest

Redraw in mortgage is a facility or feature available to borrowers that lets them pay extra funds towards the mortgage and take them back out (‘redraw’) in the future.

It’s one of the features that lenders in Australia offer on top of mortgages to provide borrowers some financial flexibility. But flexibility is only one aspect of the redraw option, and there are quite a few other helpful benefits that come with it.

In these times of rising mortgage stress in Australia, these valuable benefits of the redraw feature ensure healthy financial management when used wisely.

Ready to explore redraw in mortgage deeper? Let’s get into the details.

What Is Redraw in Mortgage?

A mortgage redraw facility allows you to pay extra money towards your mortgage on top of the minimum monthly repayments and allows you to access and withdraw this extra money from the loan if you need it in the future.

While a loan without the redraw facility might let you pay extra towards the mortgage, it unfortunately won’t let you take this extra money back out.

Although lenders in Australia offer it to encourage borrowers to follow a disciplined repayment structure, borrowers can utilise it for greater financial benefits like interest savings and more when used wisely.

The extra amount you pay towards a mortgage is calculated against the total loan balance. This ultimately brings your mortgage balance down, making the interest applicable only on this lower balance.

That means less interest payable. However, your total mortgage balance goes back up as you complete a redraw, resulting in interest being applicable on the adjusted mortgage balance, which is higher.

An Example Scenario of Using Redraw in Your Home Loan

Imagine you have a mortgage of $300,000 with an interest rate of 4% per annum. Your minimum monthly repayment is $1,500.

If you consistently pay an additional $500 each month, your total monthly payment becomes $2,000. This extra $500 is directed towards the principal, which reduces your mortgage balance more quickly.

In the first month, your extra payment of $500 reduces the principal to $299,500. That means your interest for the next month is calculated on $299,500 instead of $300,000. Consequently, instead of paying $1,000 in interest (4% of $300,000), you only pay around $998 for the month. Although it’s a small difference, this can lead to significant interest savings over time.

Now, let’s say after a year of disciplined repayments, you've built up $6,000 in extra payments. If an unexpected expense arises, you can redraw this amount from the mortgage. When you do this, your balance goes back up to $306,000 (the original $300,000 plus the $6,000 you redrew). As you can see, while you have access to this extra cash, your mortgage balance increases, and so does your interest liability.

However, if you had not chosen a mortgage without the redraw facility, you wouldn’t have been able to access it.

So, the redraw facility provides a financial cushion, but it’s important to be mindful of how you make use of it. The ideal approach is to ensure the right balance between making extra payments without overdoing it and leveraging those funds when needed.

Benefits of Using the Mortgage Redraw Facility

The benefits go beyond establishing discipline or saving on interest. Here are all of the five benefits that come with using redraw in your home loan:

• Interest Savings: Interest charges drop as extra payments reduce the overall loan balance.

• Financial Flexibility: You can use the extra funds when needed in the future.

• Repayment Holiday: You can skip future payments for a period of time (1 to 12 months, for example) by paying the equivalent amount in advance.

• Encourages Discipline: You will likely pay extra and maintain a disciplined payment structure since you have the guarantee of accessing the extra funds when needed.

• Accessibility: Accessibility is a double-edged sword here, but as a benefit, it promotes saving by reducing easy access to extra repayments.

Keep in mind that accessibility only benefits you if you are an impulsive spender. Because successfully redrawing your extra funds may take a while, usually 1 to 7 days.

Things to Consider When Using Redraw in Mortgage

Like any financial decision, there are key things to consider when using redraw. You can also see them as drawbacks, so these are every key thing you must know about the mortgage redraw facility:

• Redraw comes with redrawing fees and processing times that vary among lenders in Australia.

• It may also contain restrictions like redraw limits and minimum/maximum redrawal thresholds, depending on your lender.

• Completing a redraw may extend the mortgage term or increase the minimum required repayment amounts.

• The redraw facility is commonly available in Australia on variable-rate home loans, but some lenders may also offer it on fixed-rate loans as well.

• Ensure you get the redraw facility when switching your loan type from a variable to a fixed-rate loan, or when refinancing it.

• Manage money wisely, as contributing too much towards mortgage could put you in mortgage stress.

It’s worth noting that every time you complete a redraw, your total mortgage balance will be adjusted.

This could increase the upcoming minimum repayment amounts or increase the tenure while bringing up the total interest payable since redrawing ultimately brings up the total loan balance higher than what it currently is.

Planning on getting a mortgage with the redraw facility? We’ve helped borrowers get the right mortgage deal and save thousands of dollars on interest with the redrawing feature.

Get offers from the top 30+ lenders in Australia, with attractive redrawing terms and conditions that suit your requirements. Find your mortgage with us today. It’s free from start to finish—zero brokerage fees or commissions!

Who Should Use the Mortgage Redraw Facility?

Unless you have a good and stable financial situation, you should refrain from using redraw.

Cutting the interest on a mortgage is always an appealing idea. However, if you have a low income, you really shouldn’t pay more than what you can afford. Even if you can afford it, make sure to use only the disposable income that’s left after paying for your basic necessities and savings.

That ultimately means redraw is ideal for anyone who is financially sound, where paying extra for mortgages won’t leave a dent in their basic needs or savings.

Maximizing the Benefits of Redraw in Your Home Loan

If you are the ideal person to use the mortgage redraw facility, you can maximise the benefits by regularly paying extra money towards your mortgage with a portion of your leftover disposable income.

And by making sure you don’t redraw on impulsive decisions, you can gradually build up the extra funds over the course of a few months or years.

You can treat this money as a reserve, in a way that you can either use it in a time of emergency or use your liquid cash while taking repayment holidays. But even if you don’t use it, it will be calculated against your mortgage, helping you pay off your mortgage faster.

On a side note, when dealing with redraw, make sure to understand the terms and conditions associated with it. Because the redrawing restrictions like fees, thresholds, and processing times vary by lender.

Mortgage Redraw Facility vs. Offset Account

They both help you reduce interest payments, but an offset account in Australia is an everyday transaction account linked to your mortgage, with easier access to money and tax benefits.

You can use a mortgage offset account like a bank account to manage all your money. And the offset account balance is calculated against the loan balance, but you’re not essentially putting any extra money into the mortgage itself as you do with a redraw facility.

That means when it comes to managing your cash flow, you get better flexibility, easier accessibility, and potential tax benefits (interest saved on mortgage is not taxed) with an offset account. 

The redraw facility, on the other hand, is extra money you pay in advance towards your mortgage that you can redraw in the future. 

But since redraw means you have to take it back out from the mortgage, your flexibility and accessibility to those extra funds are limited. Depending on your lender, there may be fees on withdrawal, a minimum/maximum withdrawal threshold, and long processing times, making your cash flow a bit harder to manage compared to an offset account.

For an offset account, it’s important to do a cost-benefit analysis here since there may be fees involved that could affect your interest savings. Plus, offset accounts are common in variable-rate home loans, but some lenders offer partial offsets (which only allow a portion of the balance to be used) on fixed mortgages, which could limit your liquidity. 

Can You Use Both?

Yes, you can get the best of both worlds by getting a mortgage with a lender in Australia that allows you to combine both of these facilities.

However, we highly advise you to seek professional advice from a licensed mortgage broker or financial adviser to find the right solution for your specific circumstances. Because if you don’t have the right money management strategy to keep the two features well balanced, you’ll most likely end up with no significant benefits at all!

And a broker or adviser can also educate you with facts and professional advice to help you figure out if you should even choose either of them in the first place.

Conclusion

That’s everything about using redraw in mortgage. It’s a great way to cultivate a disciplined repayment structure and manage your debt better while saving money on mortgage interest.

But only use redraw if you are the ideal person for it. Otherwise, it’s easy to lose track of your money, put up more than what you can afford, and fall into mortgage stress, which can threaten your mental and financial health.

Good luck saving!

Compare rates from multiple lenders

Let our home loan experts secure the most suitable deal for you

I want to refinanceI want to buy a home