What is a mortgage redraw and how does it work?

When it comes to managing your home loan in Australia, having flexibility can be a game-changer. A mortgage redraw facility is one tool that might be available to you, but many people aren’t quite sure how it works or whether it’s the right fit for their needs.

In this guide, we’ll break down what a redraw is, how it works, its pros and cons, and when it makes sense to use one. Whether you’re a first-time borrower, a seasoned homeowner, or even a mortgage broker looking for clarity, you’ll find the answers here.

What is a mortgage redraw?

A mortgage redraw is a feature some home loans offer that lets you access extra payments you’ve made on your loan.

When you pay more than your required minimum repayments, that extra money goes into a redraw account, which you can then withdraw (or “redraw”) when you need it.

Think of it as a way to stash away funds while reducing the interest on your loan in the meantime.

Example of how a redraw works

Let’s say your monthly repayment is $2,000, but you pay $2,500 instead. That extra $500 goes into your redraw account.

Over a year, that’s $6,000 you’ve “overpaid,” which is now available for you to access if your home loan includes a redraw facility.

How does a redraw account work?

A redraw account is linked to your home loan. The extra repayments reduce your loan balance, which means you pay less interest overall.

But don’t confuse it with an offset account (which is a separate account). With a redraw, your extra payments are technically tied to the loan, and lenders may have conditions or fees for accessing them.

Is a redraw right for you?

Determining if a redraw facility is suitable depends on your financial goals and needs. Here are a few questions to consider:

Do you tend to make extra repayments on your mortgage?
Will you need access to those funds down the track?
Are you comfortable with the restrictions or fees that might come with redrawing?
Would an offset account be a better fit for your situation?

A redraw might be right for you if you want to reduce your loan interest while having occasional access to extra funds. However, if you need more flexibility, an offset account might be worth considering.

Pros and cons of a redraw facility

Pros:

Interest savings: Extra payments reduce your loan balance, saving you interest over time.
Access to funds: Provides flexibility if you need money for unexpected expenses.
Encourages saving: Keeps your extra funds out of sight and helps you resist unnecessary spending.

Cons:

Limited access: Some lenders may limit how often you can withdraw funds or charge fees for redrawing.
Not as flexible as offset accounts: Unlike an offset account, redraw funds are tied to your loan.
Conditions vary by lender: Different lenders and banks have their own rules, so you’ll need to check the fine print.

FAQs about mortgage redraw

Does a redraw account reduce interest?

Yes! Since your extra payments reduce your loan balance, they lower the amount of interest you’re charged.

How does redraw work on a home loan?

Extra repayments reduce your principal balance, saving you interest. You can withdraw these funds when needed, subject to your lender’s conditions.

What happens to redraw when the loan is paid off?

Your redraw balance is usually credited back to you when your loan is fully paid off, but this can vary depending on your lender.

Things to keep in mind when redrawing on your mortgage

Understand the lender’s terms: Check if there are fees or limits on withdrawals.
Plan your finances: Redrawing funds could increase your loan balance, so make sure it’s a necessity.
Speak to a mortgage broker: A professional can help you decide if a redraw suits your goals.

Ready to make sense of your options?

Choosing between a redraw facility, offset account, or other home loan features can feel overwhelming. That’s where a mortgage broker comes in.

At Broker360, we’re here to help you navigate the ins and outs of home loans so you can make informed decisions that suit your needs.

Don’t leave your home loan to chance—speak with an expert broker today and start making smarter financial moves