What happens to redraw when your loan is paid off?

A redraw facility can be an effective tool for reducing interest payments and paying out your mortgage earlier. But what happens to your redraw when your loan is paid off or refinanced?

Quick takeaways:

A redraw facility can help you pay your mortgage more efficiently.
When you pay off your home loan, your redraw facility will be empty.
When you refinance, your redraw will transfer to your new mortgage.
The funds in your redraw are not really ‘yours’ — your lender controls them. While they’re from your extra repayments, access is subject to the lender’s terms and conditions.

How redraw helps pay off a loan

A redraw facility is supposed to give borrowers flexibility — they can make extra payments towards their mortgage but can still access those funds later if needed, similar to a line of credit home loan. While a redraw is a facility attached to your mortgage, it is not a separate bank account like an offset account (which you could also use to reduce interest payments and the mortgage term).

With a redraw facility, you can withdraw contributions above your minimum payment requirements when you need the money. So, if you contribute an extra $300 a month towards your mortgage, you’d have $3600 available to redraw after 12 months.

Each lender will have slightly different rules about how much you can redraw at a time and the frequency of redraws available without attracting a fee. Lenders also typically adjust this throughout the lifetime of your loan. This is done, in part, to protect you from having considerably higher loan repayments after redrawing a large sum — which could happen if you reduced your minimum repayments because you already made extra payments to increase your redraw balance.

Adjusting how much you can withdraw also ensures that, when the loan ends and you no longer owe money, there won’t be any funds left in your redraw facility.

» MORE: How long will it take to pay off my mortgage?

What happens to redraw when your home loan is paid off?

As you pay down your loan, your redraw facility’s balance should simultaneously decrease because any remaining funds available for redraw will go towards the loan. So, once you pay off your home loan in full, your redraw facility follows your loan balance down to zero so both accounts are empty.

If you contribute more to your redraw than you owe on your mortgage, your lender will reduce the redraw balance. How much it comes down depends on various factors, though — such as your loan repayment type, if you make any lump sum payments and the number of redraws you make.

» MORE: How to calculate your home loan repayments

What happens to redraw when you refinance?

When you refinance your mortgage, you can usually transfer the balance in your redraw facility to your new loan. That way, you can access the funds as required, just like with your current mortgage.

However, every lender has different terms and conditions regarding this practice and your interest rate may have changed too. So, discussing the redraw’s terms and conditions with your new lender is good. You can also have a chat with a mortgage broker who can hopefully get you the best redraw conditions when you refinance.

There may be issues if you’ve had any missed payments or defaults in the past. Your new lender will obviously check your repayment history, too. However, there generally won’t be a problem if they are willing to approve you for a loan in the first place.

» MORE: Should I refinance my home loan?

Can lenders take away your redraw facility?

Lenders have their own criteria for features such as redraw facilities. Most mortgage contracts give lenders the power to cancel the feature, change the balance or move the goalposts regarding terms and conditions.

In Australia, banks must notify customers to gain consent before taking away their redraw facility. However, if you miss loan repayments or default, they can make you repay the entire redraw amount you took out. So, reviewing the contract with an expert is essential — whether this is your first mortgage or you’re refinancing.

If you have doubts about what could go wrong with your redraw, consider looking at other options. For example, with an offset account, your money is more readily available. And, the bank can’t take away the feature as easily. Plus, if you compare redraw and offset accounts, you may find an identical amount of savings on your interest repayments.