A mortgage is a longterm commitment and its repayments can take a large share of your income. So if you had the chance to shorten the amount or the term of your mortgage, why not check if that option fits you?
Check out this great advice from Gateway how building up a savings buffer using a redraw facility can be a good strategy for saving money while also helping to pay off your home loan quicker.
Home loan redraw facilities allow borrowers to withdraw the additional funds they put into their variable rate home loan. That is, any payments you put towards your home loan above the minimum required amount. Not only do you get the benefit of saving interest off your home loan, and therefore paying it off faster, but you have the flexibility of withdrawing the funds when you need them.
The funds aren’t as readily available as in an everyday savings account so it’s ideal if you’re saving up for something like a holiday, new car, renovations, or an annual cost like school fees. Or, you could even reinvest the money elsewhere when you’re ready, such as in another property.
How it works
To get the best use out of the facility, you need to be making additional payments towards your home loan whenever possible. This could include a one-off lump sum payment or regularly paying more than the required minimum payment.
Say your minimum monthly home loan repayment is $500 and for 12 months you pay $550, and make a lump sum payment of $3,000. You will end up with $3,600 in additional funds which you could access via the redraw facility.
If you decide to keep this on your loan, these additional repayments would reduce the amount of interest you repay over the term of the loan and shortens the time it takes to pay off the loan.
Make the most of your money
The impact of additional repayments can be significant. For example, if you have a $300,000 loan, with a 30-year term, and an interest rate of 5% p.a., the minimum monthly repayment for principal and interest would be about $1,760. If the interest rate didn’t change for the 30-year life of the loan, the total amount of interest repaid will be $224,164 plus the principal you borrowed $300,000.
However, by paying an extra $100 a month, the total amount of interest saved is more than $55,600 and the loan term is reduced by around five years.
There may also be a tax advantage in holding money in a Redraw Facility. Typically, any interest earned on a traditional savings account would be taxed at your marginal tax rate. However, under a redraw arrangement, any interest that you save on your home loan will not be subject to tax.
Is this strategy right for you?
A redraw facility can be a great feature for loan holders seeking flexibility, for others, this level of increased accessibility may not be suitable. If you have a disciplined approach to budgeting and banking, then a Redraw Facility can offer a handy financial safety net. It may even help you shorten the overall term of the home loan.