Loan Redraw Facility: Its Basic Know-how

Posted on 2015-02-19

In getting a loan, you will be most likely encountering the term “Loan Redraw Facility”. What do you actually know about it? Would it benefit you in the long run? Would it offer you the convenience in paying off your debt? Or would it bring you no good at all?

There would definitely be myriad of questions that may boggle your mind up while deciding whether or not to consider having a loan redraw facility on your loan. But knowing the salient features of a loan redraw facility may in fact lead you a step closer in wheeling your confusions away.

The way it works

Loan redraw facility is a loan feature that is typically attached when you take out a home loan or personal loan. It is a system that allows the borrower to redraw a specific amount of money he had already contributed against his loan. However, it only works when the loan is subjected to a variable interest rate – where an interest charged on the outstanding balance may differ from time to time as the market interest rate changes.

It can be considered as a useful tool that can be of great significance in paying off one’s loan earlier than the expected duration only if used properly. The idea is simple: it’s like you’re allowed to take back a certain amount of money that you have paid in excess to your loan. Say your minimum loan repayment for a year amounts to exactly $20,000 but you managed to pay back $25,000, then you’re privileged to redraw the available $5,000 overpaid on the loan.

The things to ponder

However, there are crucial considerations that you need to take into account. You should understand that engaging to such facility may charge you with additional fees. Having a working loan redraw facility may ask for a certain activation fee once the borrower agreed to attach it to his loan. The activation fee will eventually allow the borrower to use the facility whenever he wishes to.

But another thing to consider is that, some institutions may set certain limit to the number of times one can enjoy using the facility in an annual basis. Some may allow customers to redraw as often as they like, while others set a fixed number of times a borrower can enjoy this privilege. Also additional fee per redraw can be incurred and the amount you can redraw would still be subjected for changes depending on the criteria followed by the financial institution.

The good deals it offers

Unlike putting an extra amount to your savings account, putting your excess funds into your loan for a loan redraw facility, can be beneficial since the amount gain effectively the interest rate charged against your loan as opposed to savings account which offers lower interest rate. Moreover, you can worry no more on paying tax to it, whereas the interest earned in savings account is still taxed since it’s considered as income. Plus, the redraw facility may allow the borrower to reduce the amount he pays in interest and may aid in paying off his loan faster since the money he pays in excess goes directly against the loan.

Once you get the grip of how this thing works, with wise decision and discipline in handling your financial duties, you might be surprised that you have eventually managed paying your debt off with ease. In no time, you will be able to settle your debts, while enjoying the best of what this loan redraw facility can offer!