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What is a redraw facility on a home loan?

A redraw facility is a home loan feature that enables you to make extra repayments, which you can access at a later date if you need cash. A redraw facility can also help you reduce interest and pay off your home loan sooner.

 

The benefits of a home loan redraw facility

  • Build your redraw balance by increasing regular monthly repayments or making extra one-off payments
  • Access extra repayments if you need cash
  • Leave extra repayments in the facility to reduce the interest you pay
  • Reduce your home loan balance and pay less interest
  • Pay off your home loan sooner

How a redraw facility on a home loan works

If you’re comfortably managing your home loan repayments, then a redraw facility could suit you. By increasing your fortnightly or monthly payments above the minimum, or making one-off extra payments, you could enjoy a number of benefits.
 

Any money you transfer to your home loan balance in addition to your regular monthly repayments counts against the amount you owe on your home loan when your bank calculates interest charges. This has the effect of reducing the amount of interest you pay on your home loan.
 

The other key benefit of a redraw facility is that should you need to access this cash at any time, you can withdraw those extra payments by transferring them to your transaction account.
 

With a fixed rate home loan, you can make additional repayments and redraw up to $30,000 over the loan term before break costs apply1. With a variable rate home loan you can repay and redraw up when it suits you with no redraw fees or potential break costs.

How interest is calculated

Interest on your home loan is usually calculated on your outstanding balance each day and then charged monthly. If you reduce your outstanding balance even for just one day, the amount of interest you pay will also reduce.

 

Extra repayments held in your redraw facility balance against what you still owe on your home loan – this lower figure is what your bank will use to calculate interest charges on your loan.

Redraw facility example

 

You have a $535,000 loan amount on your first home. The interest rate is 2.09% and the comparison rate is 3.5%.

Your minimum monthly repayment is $2,000 – but you decide to pay an extra $200 per month into your redraw facility by direct debit.

Over the course of a year, you’ve made additional payments of $2,400.

You can leave these additional repayments, reducing your loan balance and the amount of interest you’ll pay. Or, you can use all or some of your $2,400 available redraw to spend as you wish – for example, to pay for renovations or to pay off your credit card. Note that this will increase the amount of interest you pay on your home loan.

 

Redraw facility or offset account?

Whether you choose to only use your redraw facility or add an offset account linked to your home loan depends on your personal circumstances. Both can help you make interest savings and pay off your home loan faster.
 

The main differences are how you deposit and access extra funds.
 

With a redraw facility, you can only access the additional funds by transferring them to a transaction account that will allow you to withdraw them or use them to make payments. An offset account is like an everyday transaction account, allowing you to withdraw and pay for things without having to transfer funds.
 

If you want to be less tempted to spend your extra cash and focus on paying off your home loan, you may prefer a redraw facility with its slightly more restricted access. If you want greater flexibility and access to your additional funds, an offset account might suit you better.

Combining a redraw facility and offset account

Some home loans allow you to have a redraw facility and an offset account, so you can enjoy the best of both worlds.
 

You can use the offset account for paying in things like your salary and withdrawing money on a regular basis, and the redraw account for making regular deposits.

Redraw facility or savings account?

Depositing into a home loan’s redraw facility is different to depositing into a separate savings account. It’s important to consider the differences when deciding which is right for you.

Four main differences between a redraw facility and a savings account

  1. Interest: a savings account pays interest on the amount deposited. A redraw facility doesn’t pay interest – it reduces the interest payable on your home loan.
  2. Amount of interest: home loan rates are generally higher than most savings and term deposit rates. Depositing into a redraw facility is likely to result in a greater interest saving on your home loan than the amount of interest paid on a savings account. Make sure you check and compare the rates before you make a decision.
  3. Savings account limitations: some savings accounts have minimum deposit requirements or tiered interest rates, which may mean low balances receive little or no interest. On the other hand, every cent you keep in an offset account will help to save you interest charges on your home loan.
  4. Tax liability: interest earned from savings accounts are usually considered taxable income, but interest savings on your home loan are not2. For any questions about your personal tax situation, we suggest talking to the Australian Tax Office, or your financial advisor.

To sum up

  • You can increase repayments and make one-off payments to increase the balance in your redraw facility
  • You can access or ‘redraw’ those extra repayments if you need cash
  • Money kept in a redraw facility reduces interest payments
  • A redraw facility can help you pay off your home loan sooner by saving you interest
  • An offset is similar to a redraw facility, but makes it easier to access additional funds
  • A redraw facility may save more interest than a savings account pays you.

Choose the right option for you

Choosing the right kind of home loan is an important decision, so it’s worth doing your research and getting independent financial advice.

If you have any questions about a redraw facility with Westpac, or any of our home loan products, request a call back and talk to a Home Finance Manager about your options.
 

Already have a Westpac home loan? To activate redraw, simply login to online banking to submit your request or fill out the Redraw Authority form (PDF 66KB).


Other guides to help

Our home loan offset account

Discover what an offset account is and how much home loan interest you could save, with our video, examples, articles and FAQs.

 

Redraw vs. offset

Adding a redraw facility or an offset account to your home loan can help reduce your interest payments. Find out how they differ and see which one could suit your needs best.

 

How to refinance a home loan

Refinancing your home loan may be very rewarding. It could help you take advantage of a lower interest, reduce repayments or borrow money for things you might need.

 

Things you should know

Credit criteria, fees and charges apply. Terms and conditions available on request. Based on Westpac's credit criteria, residential lending is not available for Non-Australian Resident borrowers. This information has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness of the information and, if necessary, seek appropriate professional advice. This includes any tax consequences arising from any promotions for investors and customers should seek independent advice on any taxation matters.

 

1 Break costs on prepayments and switching: Customers can make total prepayments of up to $15,000 (cumulative) for loans fixed prior to 21 March 2009, $25,000 (cumulative) for loans fixed between 21 March 2009 and 16 March 2012 or $30,000 (cumulative) for loans fixed on or after 17 March 2012, without costs or fees applying. Prepayments exceeding this threshold may incur a break cost.

 

If at any time before the end of a fixed rate period you switch to another product, interest rate (fixed or variable) or repayment type, then a break cost may apply.


2 The taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and their interpretation.