What happens to redraw when loan is paid off

Redraw facilities can be a handy tool if you need cash in an emergency or are looking to fund an expensive renovation or holiday.

But what happens to your redraw when the home loan is paid off?

Find out all you need to know about redraw facilities and where the redraw balance goes once the loan finishes.

What is redraw?

If you were to make extra repayments on your home loan, a redraw facility allows you to dip into these extra repayments at a later date if and when needed.

These extra repayments will accumulate separately to your normal repayments. Let’s say for example, your minimum monthly mortgage repayments are $3,000 and in one month you repay $5,000. You could withdraw the extra $2,000 whenever you like.

Some homeowners choose to use the redraw facility for unexpected expenses, renovations, holidays, or weddings.

Redraw facilities can also help you pay off your principal faster (assuming you don’t make any withdrawals), and are typically available with most variable rate home loans.

Funds in a redraw facility are generally less accessible compared with funds in an offset sub-account. The funds may not be available for same-day withdrawal and you may be limited to a certain number of withdrawals per month.

At loans.com.au, you get the flexibility of accessing your redraw facility 24/7 by using our Smart Money app and an unlimited number of withdrawals with your redraw facility.

Can I use my redraw to pay my mortgage?

Whether you have $50 or $5,000 available in your redraw, any money will reduce the balance you owe on your home loan. You’ll save money on interest and pay off your home loan sooner.

Here’s an example:

John has a $500,000 variable rate home loan with a 5.5% interest rate. His agreed loan term is 30 years and he chooses to make principal and interest (P&I) repayments.

John’s minimum repayment is $2,839 per month.

He decides to make additional $200 repayments a month - which is available for him to withdraw at any time.

By making these extra repayments (given he doesn’t withdraw them), John could reduce his loan term by 4 years 2 months and save $82,591.48 in interest over the life of his home loan.

What happens to redraw when the loan is paid off?

When your home loan is paid off, the redraw facility will close and the money will no longer be accessible. While you may have $20,000 in your redraw, this amount still counts towards your loan balance, so once the loan finishes, your redraw facility is gone as it’s paid into the home loan. Generally, lenders will contact you when your loan hits $0 owing prior to the end of your loan term, to request you close your loan or remove some funds from your redraw facility.

What happens to my redraw when I refinance?

Typically when you refinance, the redraw balance will transfer to the new lender and home loan product. This means you’ll still have access to the extra repayments you’ve made. It’s always best to discuss how this option works with your new lender.

If you are looking to refinance your home loan from one variable product to another, be sure to check to see if the lender offers redraw facilities for the loan that best suits your financial situation. You may also want to look carefully through the contract fine print and talk with your lender about withdrawal limits and fees. Depending on the lender, you could be charged a small fee every time you make a withdrawal.

Also keep an eye out on specific wording in the contract such as “refusing withdrawal requests at any time" and "cancelling your right to redraw any time." Most mortgage contracts give lenders the right to cancel features such as redraw. However, they would only do this if you were in arrears or your circumstances drastically changed. Essentially, these clauses ensure the lenders' legal and financial safety is never at risk from defaults and similar.

What are the benefits of a redraw facility?

Save on interest

By making extra repayments into your home loan, you can reduce the overall amount of interest payable on your home loan and also pay off your mortgage faster. However, keep in mind that this only works if you do not make any withdrawals.

Extra cash on hand

In the case of an emergency or you need some extra cash to fund your home renovations, being able to redraw extra repayments can be helpful.

May be better than other debt products

Using a redraw facility tends to be cheaper than using a credit card or personal loan. This is because the interest charged on your home loan is generally lower than other types of credit/debt products.

Accessibility

Accessing your extra repayments is usually an easy and simple process as most lenders let you request redraw via internet banking, making a phone call, or visiting a local branch.

Looking to apply for a home loan that offers unlimited redraws? Speak to one of loans.com.au’s friendly lending specialists to get started.

Apply now