There are many benefits to having a flexible home loan. Past MyRate reviews of home loan features and benefits highlighted some of these. Today, we’d like to look specifically at free additional repayments and redraw.
Additional repayments is term that means exactly that, i.e., you will not be penalised for paying more into your home loan than your minimum monthly repayments. Making extra repayments reduces your outstanding loan balance and as a result, you pay less interest over the life of your loan.
Redraw is the facility that goes hand-in-hand with your extra repayments. Redraw is a feature that gives you ongoing access to your extra funds that you have squirreled away.
(Some home loan products such as fixed loans limit the amount of extra repayment you can make as well as limit your access to these extra funds once deposited.)
Let’s say that now you wanted to invest in some shares. You could leave things the way they are and go and setup a margin loan and pay 9% interest and borrow money to fund your share purchases. Alternatively, you could draw the required funds out of the excess funds available in your home loan. This way, you would be paying around 6% which is a big saving in the interest payable.
To keep things clean and easy to track for your accountant, you could simply setup a free loan split as part of your home loan facility and treat it as a margin loan that you can move money in and out of. A loan split is just a “sub account” within your loan account that helps you organise your funds and interest charges so that you can utilise your home loan facility in the way proposed.
You have essentially got the same facility but at a lower rate of interest. You will of course need to recognise that there are no safety mechanisms such as margin calls built in to this structure.
The above comments are intended to highlight some additional benefits of having a flexible home loan and do not form advice. As always, please remember that you must obtain your own legal and tax advice re the effectiveness of such matters for your specific situation and circumstances.