Redraw Facility

A redraw facility is the portion of extra repayments you have made into a home loan that you can withdraw again. The money reduces the loan balance from the day it lands, so interest is charged on the smaller balance - a $20,000 extra repayment on a $600,000 loan at 6 percent saves roughly $1,200 a year. Unlike an offset account, the money is inside the loan rather than a separate account, and access is on the bank's terms rather than yours.

The terms are the part people skip. Banks can set minimum redraw amounts, charge redraw fees, and - as MoneySmart warns - change or freeze access at their discretion, including during hardship. On an investment property, redrawing for personal spending reduces the loan balance and can contaminate the deductibility of the interest, which is the ATO trap the offset avoids. The facility is free on many loans and priced into others through higher rates or package fees.

Walk one month. You owe $600,000 at 6 percent and hold $20,000 of extra repayments in redraw. Interest is calculated daily on $580,000 rather than $600,000 - roughly $95 a day instead of $99 - which is $100 a month, or $1,200 a year, of interest you never pay. The saving is identical to what an offset balance of the same size would save; the difference is who controls the money.

The access rules are the second mechanism. Redraw is a contract feature, and the contract sets the terms: minimum redraw amounts of $500 to $1,000 on many products, redraw fees on some, and discretionary access the bank can suspend - MoneySmart's guidance warns lenders can change or freeze redraw during hardship, exactly when the money is needed. The emergency fund parked in redraw is a buffer the bank administers, and the emergency fund entry covers the sizing.

The tax mechanics are the third mechanism. On an investment loan, redrawing for personal spending reduces the loan balance and mixes private borrowing into a deductible loan - the ATO treats the interest on the redrawn portion as non-deductible, and the contamination is permanent. The offset preserves the loan balance and the deductions, which is why investors prefer it. Extra repayments on fixed-rate loans are also capped at $10,000 to $20,000 a year on most products, which is why the redraw on a fixed loan is small. The redraw facility calculator prices the savings at any balance.

For an Australian reader, the redraw is the buffer inside the mortgage. The money saves the loan rate from the day it lands, and on an owner-occupied home that saving is tax-free. The trap is the access: the bank controls the tap, sets the minimums, and can freeze the feature during hardship. The offset account entry covers the separate-account version that trades a slightly higher rate for control. The comparison rate entry folds the facility's price into the true cost.

A colleague named Brent (yes, that Brent) used his redraw as the family emergency fund, then lost his job in a restructure and requested a withdrawal during hardship. The bank froze access while the hardship process ran, and the buffer he had built was unavailable for six weeks. The highest-leverage thing most Australians can do is size the emergency fund in an offset or savings account you control, and treat the redraw as acceleration on the loan rather than a bank account.