Are you looking to save money by reducing the balance of your home loan? A redraw facility is a useful tool that could help you pay off your mortgage sooner if used wisely. A redraw facility is offered by a large percentage of home loans– so how does it work, and how can it help save you money?
A redraw facility allows you to access any additional funds that you have paid into your home loan. You need to make extra payments on top of your minimum loan repayment first in order to be able to use a redraw facility. This includes one-off lump sum repayments or regularly paying more than the required minimum repayment.
If your minimum monthly home loan repayment is $700 per month and for twelve months you pay an extra $50, making it $750 per month, and make a lump sum payment of $2,000, the total of your additional payments at the end of this period will be $2,600. You can access this amount via the redraw facility if you need some cash in the future. However, if you decide to keep this on your loan, these additional repayments would reduce the amount of interest you repay over the term of the loan and shortens the period it takes to pay off the loan.
If you are in the position to do so, making additional repayments can significantly reduce the length and cost of your loan. Paying extra money that you have on hand into your home loan can be an easier decision when you know you have the ability to access these additional payments at a later date by withdrawing any additional home loan repayments you have made into the redraw facility. Redrawing extra payments you’ve made will reduce the benefit of making additional repayments. But knowing you’re able to redraw additional repayments if necessary, allows you to increase the extra amount of repayments you pay.
Advantages Of A Redraw Facility
The major selling point of redraw facilities is the compound interest earned on your repayments. It’s actually very beneficial because the interest you’re being charged on your home loan is likely to be higher than the interest rate you’re able to achieve on any cash savings account.
Many loan holders will find that if they’re disciplined with their money, a redraw account goes a long way towards paying off a loan while still providing a contingency to pay off future debts. No matter what the money is spent on eventually, you can rest easy in the knowledge that the amount owing on your loan was reduced while you had that extra money in your account.
You should be mindful of the tax advantages of using this facility since while any interest earned on a cash investment will be taxed at your marginal tax rate, any interest that you save on your home loan by keeping money in a redraw facility will not be taxed at all.
Although a redraw facility offers many advantages, its benefits work best with the right type of borrower. It’s important to determine whether this facility will suit your circumstances and your personal approach.
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