A Review of the Redraw

You may have heard the uproar in the last few weeks as a result of ME Bank messing with the redraw facilities of an estimated 20’000 of their clients. By messing with, we mean they effectively switched them off, understandably causing considerable upset and anguish of those affected.

To understand the possible implications of a scenario like this, let’s first strip it back.

What is a redraw facility?

A home loan redraw facility allows you to make extra repayments on your home loan and then take them out or “redraw” them as and when required.

Depending on your situation, some pro’s of utilising this kind of facility may include having funds available for an emergency, the ability to earn compound interest the additional funds, and the potential to pay less interest on your mortgage long-term.

Some people actually use their redraw facility much like an everyday savings account, using it to pay their usual living and day-to-day expenses.

So you can see, if you were using your redraw facility this way, how it would cause undue mayhem if the lender were to quite simply, make the money disappear from your account overnight and without warning.

To clarify…

ME Bank didn’t “take” anyones money, but they stopped it from being available to withdraw. Their reason for doing so was to reduce their own exposure in the current climate.

A spokesman for the bank, which is owned by a group of industry super funds, said it made the move after figuring out that “the redraw facility of some legacy home loans could lead to some customers falling behind their original repayment schedules”.

What’s another option?

The best way to counter the risks associated with redraw facilities is to keep your money in an offset account linked to the home loan. This costs or saves you the exact same interest wise but the difference is the banks can’t touch it and if they did the government backs your savings up to $250k with an (ADI) Australian deposit taking institution.

The chances of history repeating in this situation are fairly slim, given the backlash against ME Bank in the aftermath of their decision but in these times it’s better to be prepared for all possible outcomes.

We can easily set up your offset account at the same time your home loan is arranged/refinanced, so please get in touch if this is something you would like to consider and discuss more.

All lending subject to status and lenders criteria. Terms & conditions apply. This document contains general information only. Your own personal circumstances have not been considered and you should seek independent financial advice prior to making any decision on a financial product.

2020-05-19T13:12:18+00:00 May 19th, 2020|Uncategorized|