What Does Redraw Mean on a Loan or Mortgage?

A redraw facility on a loan, most commonly seen with mortgages, allows borrowers to access extra payments they have made on their loan. Its fundamental purpose is to offer flexibility, enabling individuals to reduce their interest burden by making additional payments while retaining the ability to retrieve those funds if an unexpected need arises. This feature can be a valuable tool for managing personal finances, offering a pathway to pay down debt faster while still providing a financial safety net.

Understanding Redraw Functionality

Making extra payments on a loan equipped with a redraw facility directly contributes to reducing the principal balance, leading to significant interest savings over the life of the loan. The accumulated extra payments then become the “available redraw amount,” which is a portion of the principal that has been overpaid and can be re-borrowed.

When a borrower decides to access these funds, through online banking portals or by contacting their lender, the loan balance increases again by the redrawn amount. Future interest calculations will be based on this new, higher principal. While the loan balance increases, the original loan term and scheduled repayment frequency remain unchanged. This mechanism provides a way to temporarily access liquidity without needing to apply for a new loan.

Eligibility and Usage Considerations

Accessing a redraw facility requires specific conditions to be met. A common eligibility requirement is that the borrower must be ahead on their loan repayments; lenders mandate being at least one scheduled repayment ahead to utilize the feature. There can also be minimum redraw amounts, depending on the lender’s policies. Some facilities might also impose limits on the maximum amount that can be redrawn at one time.

Fees associated with redraws can vary widely; some lenders offer fee-free redraws, while others might charge a flat fee per transaction. Frequent or large redraws can impact the overall loan repayment schedule by increasing the principal balance. While making extra payments reduces interest, redrawing those funds diminishes the interest savings accumulated. Therefore, borrowers should consider the financial implications of each redraw on their long-term interest costs and repayment trajectory.

Distinguishing Redraw from Other Options

A redraw facility is a feature of an existing loan, allowing access to overpaid principal, which fundamentally differs from a line of credit. A line of credit is a separate, flexible loan facility with its own credit limit. It functions more like a revolving credit account, where borrowers can draw funds up to an approved limit as needed, and interest is charged only on the borrowed amount. Unlike redraw, a line of credit is not tied to overpayments but represents a separate borrowing capacity.

Refinancing, conversely, involves replacing an existing loan with an entirely new one, potentially with different terms, interest rates, or a new principal amount. This process requires a new loan application and credit checks. Refinancing can be used to access equity, consolidate debt, or secure a better interest rate, but it is a complete restructuring of the debt, not merely accessing overpayments on the current loan.

An offset account is another distinct financial product often compared to redraw, but it operates differently. An offset account is a separate savings or transaction account linked to a mortgage, where the balance held in the account reduces the principal on which interest is calculated. The funds in an offset account remain accessible as savings, behaving like a regular bank account, whereas redraw involves re-borrowing funds that were used to pay down the principal of the loan. While both can reduce interest payments, an offset account keeps funds separate and liquid, while redraw involves the temporary re-accessing of previously paid-down principal.