Example of redraw in mortgage and its benefit
Here is a simple example of how a redraw feature in a mortgage works and its potential benefit!
Scenario
- You have a home loan with a remaining balance of $200,000.
- Your monthly mortgage payment is $1,000.
- Your lender allows you to make extra repayments toward your mortgage, which you've been doing consistently for the past few years.
Benefit of Redraw
Let's say you've made $20,000 in extra repayments beyond your regular monthly payments over the years. With a redraw feature, you have two options:
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Leave the extra funds in the mortgage: You continue making your regular monthly payments of $1,000, but you leave the $20,000 in extra repayments in your mortgage account. These funds reduce the outstanding balance on your mortgage.
- Benefit: By keeping the extra funds in the mortgage, you pay less interest on the remaining balance. This means you'll pay off your mortgage faster than if you hadn't made those extra repayments.
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Redraw the extra funds: At some point, you have a financial need, such as home improvements or an unexpected expense. Instead of taking out a separate loan or using a credit card, you decide to redraw the $20,000 from your mortgage.
- Benefit: The redraw feature allows you to access the extra funds you've paid into the mortgage without the hassle of applying for a new loan. The interest rate on your mortgage is typically lower than that of credit cards or personal loans, so this can be a cost-effective way to cover your expenses.
In this example, the benefit of the redraw feature is that it provides you with flexibility. You can choose to either pay off your mortgage faster by leaving the extra funds in the loan or access those funds when you have a financial need. It's important to check with your lender regarding any fees, restrictions, or conditions associated with redraws, as these can vary between lenders and mortgage products.