What a redraw facility is
A redraw facility lets you withdraw any repayments you've made above the minimum. It's mostly offered on variable rate loans, and rarely on fixed rate or interest only ones.
For example, if your repayment is $300 a month and you pay $400, after a year you'd have $1,200 you could redraw.
How it works
The amount you can redraw usually shows in your online banking or app, and you can request it there, often with the money arriving almost straight away. Some lenders set a minimum redraw amount or charge a fee. Once you redraw, your balance goes back up, and so does the interest you pay.
You can use redrawn money for anything, such as a holiday, a car, home improvements, study or medical bills.
Pros
- Extra repayments cut the interest you pay and can clear the loan sooner.
- The money is still there if something comes up, a bit like savings.
- The interest you save isn't taxed, unlike interest earned in a savings account.
Cons
- There may be a minimum or maximum redraw amount, a fee, or a limit on how often you can redraw.
- Redrawing puts the balance back up, and you lose the interest saving on that money.
- Fixed rate, interest only and some secured loans don't offer redraw at all.
- Money that's easy to take back out is also easy to spend.
Redraw or savings?
If your loan's rate is higher than what a savings account pays after tax, extra repayments with redraw usually leave you better off. If you want the money kept apart so you're not tempted, or your lender limits redraws, a separate savings account may suit you better.