Using a Mortgage Loan Re-draw Facility

A Strategy to Reduce Mortgages Using the Re-draw Setup on Mortgages

Sep 17, 2009

By using a mortgage re-draw facility and a credit card a mortgage can be repaid quicker. Less money is owed to the bank, so each dollar earns without a tax liability.

The principle of this strategy to reduce a mortgage is to pay all available cash into the mortgage and put all bills on the credit card. Then repay the credit card balance when due from the mortgage re-draw facility.

How a Mortgage Re-draw Facility Works

A mortgage re-draw facility is an arrangement with a bank or lending institution where a borrower makes higher than required monthly repayments on their mortgage loan. These extra mortgage payments reduce the amount of the loan, so the interest is calculated on this lower amount.

Because the extra mortgage payments are set off against the remaining amount of the mortgage loan, the extra mortgage payments are effectively earning interest at the same rate as the mortgage loan interest rate. But tax does not have to be paid on these earnings.

For example, if $1000 was put in a bank account and earned 1% interest, then tax would have to be paid on the annual income of $10.

However, if this same $1000 was put in a mortgage re-draw facility it would reduce the amount of the loan by $1000. If the mortgage interest rate was 3%, then effectively, the annual interest bill would reduce by $30.

These figures don’t seem much, but the $30 would be tax free, so there is in a way a double saving, by using the mortgage re-draw facility.

Also, usually the extra payments can be re-drawn, so this extra money is not tied up. Though in some cases there may be a fee, or a limit on the number of re-draws allowed.

Using a Credit Card with a Mortgage Re-draw Facility

This system of using the mortgage re-draw facility can be enhanced by coupling this strategy with a credit card.

In this strategy, all the monthly bills are paid on the credit card. Then the full credit card amount owing is re-drawn from the mortgage.

The basics is that during the credit card statement cycle all bills go on the card while all available cash goes into the mortgage and is re-drawn when the credit card payment is due.

The money is offset against the principal of the mortgage, so less interest is accruing and so “earns” tax-free interest on the daily balance.

Mortgage Re-draw Strategy Needs Discipline and a Budget

However, there are two main personal attitudes needed to implement this mortgage re-draw strategy and achieve the potentially large savings.

By putting all expenses on the credit card, it is easy to quickly overspend the amount saved in the mortgage. A night out here, some new clothes there, and the usual expenses that crop up like car and house maintenance, can all add up extremely quickly.

To keep spending under control a budget is essential. The budget must determine how much can be put on the credit card each month. The simplest way to do this is to calculate the total annual expenditure then divide by 12. This gives the amount needed to be available at the end of each month in the mortgage re-draw facility.

Mortgage Re-draw Traps to Watch Out For

By following this strategy of combining clever use of the credit card with a mortgage re-draw facility, a mortgage should reduce rapidly.

The copyright of the article Using a Mortgage Loan Re-draw Facility in Home Mortgages is owned by Bruce Iliff. Permission to republish Using a Mortgage Loan Re-draw Facility in print or online must be granted by the author in writing.