Remove the temptation to withdraw from your home loan

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DESPITE the Reserve Bank of Australia keeping the cash on hold this month borrowers are being urged to steer clear of dipping into the loans as buffers build up.

Prior to the Global Financial Crisis it wasnt uncommon for home loan customers to pull money out of their mortgages and use their redraw facility as an ATM to fund expenses including new cars or holidays.

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RATE bait is catching out home loan customers

In many cases borrowers are paying interest rates below the four per cent mark, so for those making more than the minimum repayments on their loans their redraw accounts are building up quickly.

But AMP financial planner Mark Borg warns that using your fattened redraw facility for lifestyle expenses is a dangerous move and one that should be avoided at all costs.

Using your redraw to top up your lifestyle is really just destroying your wealth, for example buying a new TV, going on a holiday, buying a new car or clothes or spending it to get a good bottle of wine,’ he says.

You are not building up any wealth when you pull money out of your redraw account and you are failing to maximise the advantages that a low-interest rate environment affords you.

A better way to address this problem is to use an offset account, because when you use funds here your mortgage is still going down but if you want to dip in and dip out you are quarantining the amount you are doing this from.

The RBA kept the cash rate on hold at 1.75 per cent and another rate cut is tipped for August.

Data from financial comparison website shows on a $300,000 30-year home loan the average standard variable rate is 4.83 per cent and monthly repayments are $1579.

On the same loan size that is fixed for three years the average rate is 4.29 per cent and monthly repayments are $1483.

ING Directs executive director of customers John Arnott says of their home loan customer base, 40 per cent are ahead of their repayments and only 10 per cent redraw from their loans.

The average amount in a redraw account is $30,000.

There are no fees at many banks to access your money (in a redraw account),’ Arnott says.

Our existing more customers are attempted to get ahead while they last, so its an exciting time to be a homeowner but it shouldnt detract from the great saving discipline that weve seen from Australian consumers in the last five years.

The RBA board is expected to keep the cash rate on hold at 1.75 per cent this month.

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