With increased interest rates, more borrowers are looking for effective ways to pay less interest on their mortgages. One of the effective ways to reduce interest is using a redraw facility. Now, you may have questions like: Does a redraw account reduce interest and how redraw facility can help you reduce interest? Continue reading this blog to get answers to these questions.
What is redraw?
Redraw helps in reducing the total amount of loan on which your interest is calculated, but it does so in a different way. With a redraw account, you can make extra repayments to your home loan, but you can access the funds available when you want to. Redraw is not a separate account. Redraw facility is a feature within your mortgage that makes you able to redraw any extra payments that have been made by you, other than the amount of one repayment. Basically, this ensures that there are sufficient funds available to meet your next repayment amount.
How does redraw work?
You might be wondering: How does a redraw account work? A redraw facility is different from an offset account but can still help you save on your home loan.
Redraw lets you access extra payments you’ve made on your home loan. For those who pay weekly or fortnightly via direct debit, only the amount exceeding the minimum required repayments will be available. Keep in mind that the balance in your redraw account may decrease throughout the life of your loan, so by the end of the loan term, both your loan balance and the available redraw amount will reach zero.
Does a redraw account reduce interest?
Now, the question arises: Does Redraw Reduce Interest? A redraw account works the same way as an offset account. For example, if you have a $500,000 mortgage and $50,000 is in your redraw account, then your mortgage will be calculated on a balance of $450,000. The amount available in the redraw account will minimise your home loan amount for interest purposes.
Both a redraw facility and an offset account enable you to use your savings to lower the interest on your loan, potentially helping you pay off your home loan more quickly. Every dollar in either the redraw or offset account will directly reduce the interest you’re charged.
What happens to the redraw facility when the loan is paid off?
You might be looking for an answer: What happens to redraw when loan is paid off? After paying off your home loan, the redraw facility will no longer be available and you won’t be able to access the money. In this case, your loan and redraw balance will become zero.
Difference between offset and redraw
Here is the difference between redraw and offset account:
| Offset | Redraw |
| An account linked to your home loan. | A feature within your home loan where extra funds are deposited, which can be accessed later. |
| The balance in your offset account lowers the amount of interest you pay on your home loan. | The available balance in your redraw facility also reduces the home loan balance for interest calculation purposes. |
| You can link a debit or credit card to your offset account. | A debit or credit card cannot be linked to your redraw facility. |
| You can transfer money in and out of your offset account as you would with any regular bank account. | While you can access funds in your redraw facility, it may take 1-2 business days to withdraw, unlike the immediate access provided by an offset account. |
| Your offset account funds are available to you just like savings in a regular account. | The available funds in your redraw facility may decrease over time as you make progress in paying off your home loan. |
| Your offset funds remain accessible to you as they would in a savings account. | Your available redraw funds consist of any extra contributions made, minus one scheduled repayment amount, ensuring sufficient funds are left for the next payment. |
Conclusion
In a nutshell, the redraw facility can help you reduce your home loan amount for interest purposes. A redraw account is quite different from an offset account, so make sure to choose the right option that matches your financial circumstances. To choose the right option, Star Homeloans can help you.
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