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Use of Lines of Credit and Redraw
Line of Credit
A line of credit home loan is a credit facility secured with a first mortgage on a residential property. Similar to a credit card, they allow you to withdraw funds up to a set limit at any time. Repayments can be made in full or on a monthly basis.
Redraw
Redraw facility is probably one of the most widely used loan features on the market. Redraw allows you to make additional repayments into your loan account and then access these extra funds when necessary. A redraw facility has two key advantages; it encourages borrowers to make extra repayments, thereby saving on interest costs, and it provides flexible access to funds when they are most needed.
Apart from the most basic variable home loans, just about all mortgage products offer this facility. When considering a loan with a redraw facility, think about the following:
- Is there an activation fee? Some lenders charge a fee of up to $300 to activate the facility on your account. This is usually a one off fee when, and if, you decide to use the feature.
- How many free redraws are offered per year? Once you reach your quota, some lenders charge a set fee for each redraw, typically $10 to $50.
- Is there a maximum number of redraws allowed per year? Some lenders offer unlimited redraws, other products allow a set amount.
- What is the maximum redraw amount? Usually it is the total amount of additional repayments made but varies with different products.
- What is the minimum redraw amount? Many lenders set no minimum, while others have minimums of several thousand dollars.
Depending on the fees attached, a redraw facility works best for borrowers who need to redraw against extra repayments infrequently. If you plan to use your home loan as your main transaction account, a redraw facility may not be the most appropriate product.
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