How to Use Additional Repayments and Redraw Loan Features to Pay Off Your Loan Sooner
There are a lot of features you can add to your home loan and having a fully customisable loan product can be a great way to tailor a loan to your needs. However, you need to make sure you are actually going to use and benefit from these features because otherwise they are simply costing you money.
Additional repayments and a redraw facility are some of the original and most basic loan features, but that doesn’t mean you can’t benefit from their simplicity, and pay off your loan sooner. Plus, if you shop around you can find a loan which charges minimal fees, or no fees at all for additional repayments and redraw.
What is an additional loan repayment and how can it help?
When you make a deposit to your loan account above the minimum monthly repayment amount, this is an additional repayment, and comes directly off the principal loan amount. You can make additional repayments by making a lump sum payment into your loan account, or you can regularly make a monthly repayment above the minimum amount. Getting into the habit of paying more each week or month can offer a buffer if you are on a variable rate loan and interest rates rise, as you have already made that room in your budget.
For example, if you have a $250,000 loan with a 6.45% interest rate and a 25 year loan term, your monthly repayments will be around $1,680.22. Over your loan term you will have paid $254,062.68.
However, if you paid just $100 per month extra, every month then you will have repaid your loan three years and one month earlier and paid just $216,848.17 in interest that is a $37,214.51 saving in interest.
Finding an extra $100 each month is just $25 per week and you may even be able to find more and set your automatic monthly repayment higher. If not, you can always make additional lump sum payments when you can, for example, from gifts of money or your tax return.
How to use redraw facilities
When you make those additional repayments to your loan they are not gone forever, instead additional repayment features will often come with the companion feature of redraw so you can withdraw those additional repayment amounts if you need them, or if you have been using your loan account as a savings account for extra funds, while saving on interest charges.
Of course, if you redraw the amounts you have made in additional repayments, your loan amount will go back up and so too will your repayments. You will also need to be aware of redraw terms, conditions and costs such as:
- Redraw facility fee. You may be charged a flat fee for a loan with a redraw facility and while you may have to pay this fee upfront with your other application fees, it may be charged like an activation fee, the first time you use the redraw facility.
- Fee per redraw. Some loan accounts will charge you a fee per redraw you make from your loan, but it is possible to shop around and find a loan with free redraws, some banks can charge as much as $50 per redraw.
- Free redraws per year. In some cases you can receive a certain number of free redraw transactions each year, and once you have used up those transactions you will be charged a redraw fee.
- The maximum number of redraws per year. You may be limited to a certain number of redraw transactions each year and once you have used up these transactions you can no longer withdraw from your loan account that year.
- The minimum redraw amount. Your redraw facility may require that you withdraw a certain amount from your loan account each time and while some accounts have no minimum redraw, others will require a redraw of at least $5,000 each time.
- The maximum redraw amount. You may be limited to the amount you can withdraw from your account because while redraw gives you access to all funds you have paid above your minimum repayments, some lenders will allow you to redraw up to this additional amount, less one month’s repayment.
How to compare redraw facilities?
Because additional repayments and redraw are loan features often taken for granted beside line of credit loans and offset accounts, you can usually find a good deal on fees and conditions if you shop around. Look for no or low fees to withdraw additional repayments from your account and make sure you’re not limited, or forced to withdraw more than you need each time.
To help you choose a home loan with a redraw facility you need to think about how you plan to use your loan account because there is no point in searching for a loan with these features if you’re not going to use them, and there is usually some sort of charge, compared to a basic loan without any extra features – usually in the interest rate.
Even if you don’t think you can spare much of your wage for additional repayments, making the effort can reap genuine savings. Rather than aiming to deposit your extra funds into a savings account, keeping them in your home loan will save you more interest than you would have earned, as a high interest savings account will pay around 5% interest but if you are paying 7% interest on your home loan, you are actually losing 2% in interest. Plus, the interest earned from your savings is being taxed, however, you are not taxed on interest you save. Even if you have a long term goal such as a car or a holiday, instead of depositing into a savings account, deposit into your home loan, and redraw the funds when you reach your goal.
Related posts:
- Home Loan Features
- How to Use Your Home Loan Features, Redraw, SmartPay, Direct Debit
- What features help repay a home loan faster?
- Mortgage Redraw Facilities – How Can They Be Used?
- Offset Versus Redraw: The Winner Is…
- Home Loan Features
- Gateway Home Loan Redraw
- Redraw Vs Offset Accounts Explained
- Accessing Your Mortgage Repayments
- 10 Simple Steps to Pay off your mortgage sooner
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