What Is Redraw?
Exactly what is redraw and how can you use it to your advantage? When should you use it and how can it be used for savings?
Exactly what is redraw?
Redraw is when you have surplus funds on your home loan and you decide to take back those surplus funds. Lets look at an example. You have a home loan where your minimum repayments are $2,100- per month. But you decide to make extra repayments and each month repay $2,500-. This means you have a surplus each month of $400- as this is the extra repayments you are making. Over the course of 12 months, this surplus would amount to $4,800-. This is what is known as your redraw amount. The amount you can get back out of your home loan, no questions asked. It is quick and easy to see how much you could save by making extra repayments by looking at our calculators.
How Can You Use Redraw To Your Advantage?
As the above example shows, by making extra repayments each month, you build up a redraw that you have access to. Not only does this give you ready cash in an emergency, but it will also reduce the amount of interest you repay over the course of your loan. Interest is calculated based on your daily balance and then charged to your loan each month. The more you reduce your loan, the less interest you pay each day. Another way to use to your advantage is if you are looking to do a renovation or an investment. By paying extra into your loan, you may be able to save for these without doing a formal increase. Remember, these are your funds and you can access them at any time.
When Should You Use It?
You should try not to use redraw if you can help it, however, there are times when smart thinking can help you out. Annual property rates are one. You know you have to pay your council and water rates each year, so why not put that money away each pay. You can work out what your annual amount is going to be and each fortnight direct that corresponding amount to your home loan. This way, you reduce your home loan slightly more than you need to, building up a small surplus (or redraw). When it becomes time to pay your rates you would have the funds available in redraw to pay them.
Redraw To Do Debt Consolidation
You may have been slowly building up a surplus on your Home Loan, but now want to clear some other forms of debt. Although it is ideal not to get the other debt in the first place, sometimes you need the advice of a debt reduction specialist to help you decide if it is the right thing to do.
How To Use Redraw As Savings
Another way to use redraw is to save for big ticket items. It doesn’t matter what it is, rather than take out a loan, maybe try to save a bit extra each fortnight or month by again putting extra funds onto your home loan. This can be especially helpful for those medium costs, like school fees, wedding, overseas travel or a milestone birthday bash. If you are really discipline, there is no reason you can’t save for a new car or other major items. Just work out how much you want to save to to the purchase and put the weekly, fortnightly or monthly amount away. Not only are you saving the money, you are again reducing the interest you pay on your home loan. Meaning you pay off your home loan quicker while doing your savings.
So what is redraw? Redraw is the amount of surplus funds you have on your loan. Your funds, which on most (not all) loans you will have instant access to (subject to lender rules).
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