The redraw facility on a mortgage is a popular feature for many borrowers, but users need to be aware of a few traps that could end up costing them more than they realise.
A redraw facility allows you to access additional repayments that you’ve made on your home loan over and above the minimum required payments.
Most variable rate mortgages have the feature, but only around two thirds have full offset accounts. Offset accounts are everyday bank accounts linked to your home loan but sitting outside the home loan, and every dollar that’s in that account offsets the balance of the loan, reducing the interest paid on the loan.
Offset accounts can save borrowers thousands of dollars if they are used correctly, but if you’re not aware of how your lender treats extra repayments it could cost you.
Redraw facilities sometimes come with some small print that can blow out the total cost and duration of the loan.
On top of that some smaller lenders can charge up to $100 for each withdrawal, or can install minimum withdrawal amounts.
“Redraw facilities can seem straightforward, but many borrowers don’t read the terms and conditions of their redraw facility and can get tripped up by the consequences of moving money in and out of a loan,” RateCity’s Sally Tindall told Australian Financial Review.
“If you’ve got extra money stashed in your home loan in a bid to pay off your loan early, make sure your bank does not lower your monthly repayments, as this will counteract your efforts.”
Mortgage broker Phoebe Blamey is from Clover Financial Solutions and said anything that helps pay off your home loan is a good thing but warns borrowers to be wary of that small print in the terms and conditions.
“There could always be a temptation for homebuyers feeling the heat from rising rates and inflation to dip into any additional savings,” she told AFR.
“That means it is extra important to understand at what cost that comes.”
Sally Tindall said it was important to read the product disclosure statement carefully, because you may not save as much interest or time if your banks lowers your repayments as time goes on.
“While this can seem like an attractive option because a customer’s repayments drop, it could mean they won’t pay off their loan sooner,” she said.
“They’ll also pay significantly more interest over the life of their loan.”
“Borrowers who have their monthly repayments reduced after they make a lump sum will see the amount of money available in their redraw shrink over time,” Ms Tindall told AFR.
“That’s because each month, part of this money will go towards paying down their debt. If the customer wants to take money out, they will find they have less than they initially put in. Also, when they take the money out, their repayments are likely to increase.”