The advantages of redraw facility
1. By increasing your monthly installments or making additional one-time payments, you can increase your redraw balance.
2. Reduce the amount of interest you pay by leaving extra repayments in the facility.
3. Pay less interest on your house loan by lowering the sum.
4. Pay down your mortgage as soon as possible.
How a home loan's redraw facility operates?
If you can comfortably make your house loan payments, you might be a good candidate for a redraw option. You might gain a lot of advantages by paying more than the minimal amount each month, or by making one-time extra payments.
Your bank will deduct interest from the amount you owe on your home loan for any additional funds you transfer to the balance in addition to your scheduled monthly repayments. The interest charged on your home loan will go down as a result of this.
Another important advantage of a redraw option is that you can always withdraw the additional payments by transferring them to your bank account whenever you need to access the money.
How interest is calculated?
Typically, interest on your home loan is computed daily based on the remaining balance and then assessed on a monthly basis. The interest you pay will go down if you even just shorten the amount that's overdue by one day.
Extra repayments retained in your redraw facility balance are subtracted from the amount you still owe on your house loan; your bank will use the lower amount to determine the interest rate on your loan.
Redraw facility example
Your have a $1,000,000 loan amount. The comparison rate is 6.31%, whereas the interest rate is 5.93%, as of Dec 2023.
You choose to pay an additional $200 each month by direct credit into your redraw facility, even though your minimum monthly P&I repayment is $5,951. You have made $2,400 in additional payments over the course of a year.
If you choose not to make these extra payments, the amount of interest you will pay on your loan will also be reduced by around $142 every year. Alternatively, you can choose to use all or part of your $2,400 available redraw anyway you like, such as paying for improvements or clearing your credit card debt. Keep in mind that doing this will result in a higher interest rate on your house loan.
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