The Pros and Cons of a Redraw Feature
Pros and Cons of Redrawing on Your Mortgage
When you are focused on paying off your home loan, it’s a good plan to put any extra funds straight into your mortgage, reducing your interest rate and paying off the loan faster. However, this doesn’t leave you much flexibility for emergencies, changing circumstances or even little luxuries like a trip away. One option is to set up your loan with a “redraw” or “borrow back” feature. You can overpay your mortgage, reducing the interest, and then withdraw the money when required.
What is a redraw facility?
With the redraw or borrow-back facility, you have the flexibility to make additional repayments on top of your regular loan repayments. Then you can redraw money from the account when you need extra funds.
When you make additional repayments into your mortgage, you have already reduced the interest on your loan, even if you withdraw some of the funds later to cover other debts or a financial emergency. In the long term, this is more cost-effective than saving the additional funds in a term deposit or using a credit card for additional expenses. A term deposit would not give you as much value through interest payments, and the credit card would charge you a much higher interest rate.
There are several ways you can boost your investment value through the redraw facility. If you are planning to increase the value of your home through renovations, the funds can be stored in your mortgage account until needed, giving an additional boost to your long-term investment. Another strategy is to make extra repayments off your mortgage while the rate is high and then borrow back the funds when the rate has dropped.
The “borrow back” feature also gives you peace of mind, knowing that you have emergency funds at your disposal, and that you are taking the most cost-effective approach with your mortgage repayment.
The redraw/ borrow back system works best with people who are self-disciplined with money and have a well-structured long-term plan. There is no benefit to this feature if you are not prepared to pay more than the standard monthly repayment. And the additional funds are not easily available. There can be restrictions, limits and withdrawal fees, which could make life complicated if you are not working to a specific budget. However, these limits can help you stick to your long-term plan, rather than being tempted to draw out the excess funds in your mortgage account!
Is the redraw feature right for you?
Rather than looking at the redraw facility as easy access to extra cash, think of it as part of your investment plan, helping your money work for you. Talk to your mortgage broker or financial adviser to work out how much you can afford to pay off your mortgage and whether you can manage to pay a little extra above the standard repayment. Consider your long-term goals – if you are in a comfortable position right now, but planning to renovate or change jobs or you just want some flexibility for a nice holiday some time over the next few years, the redraw facility could be a good option for you.