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Home Loan Redraw Facility Explained

June 24th, 2013 Leave a comment

In recent times, the redraw facility has become a common feature in most home loan packages in Malaysia.  Whilst the concept of redraw is relatively simple to understand for most seasoned home buyers; a new home buyer may find this term slightly confusing as it really isn’t something you see everyday.

In this article, we explain what redraw facility is and how you would be able to take advantage of it if your home loan has this feature.

What is Redraw?

Redraw is the act of accessing excess payment you have made on your home loan.  To understand this concept, we will first have to explain what excess payment in a home loan is.

In Malaysia, most home loan packages allow you to make excess repayment, which basically means extra payment you pay to the bank on top of the minimum loan repayment amount.

Example:

Say your monthly home loan repayment is RM1,000.

And this month, you’ve made a repayment of RM1,100.

Your excess repayment = RM1,100 – RM1,000 = RM100.

Making these excess repayments is not without its benefit.  For most home loan packages, the excess repayments are used directly to offset the principle loan amount, which in turn reduces the amount of interest you’ll pay over the term of your home loan.

A redraw facility is a feature that allows you to withdraw excess repayments you’ve made on your home loan.  Say you’ve been making extra repayments religiously and have accumulated a total of RM10,000 in excess repayments, a redraw would allow you to take out that RM10,000 as cash for your own use.

Obviously, making a redraw means you’ll lose out on all the interest-saving benefits stemming from making excess repayments; but it is still a very handy feature especially when you need cash in a hurry and wish to reuse the excess repayments you’ve made.

One Thing to Take Note Of When Using Redraw Facility

Whilst the availability of redraw facility undoubtedly makes excess prepayment seems like a good idea for a home loan; one should always remember that executing a redraw usually involves fees and charges.

In Malaysia, most banks charge a standard fee of RM50 for every redrawal from a conventional home loan package.

For anyone carrying a home loan, the existence of redrawal fees is significant as it means you CANNOT treat your home loan like a standard current account (where you can put in and take out money as you like).

So before you make that excess payment, make sure you won’t actually be needing to redraw it a couple of days or weeks down the road… for you could potentially be losing more money than you’ve saved by making redrawals one time too many!

This article comes courtesy of www.imoney.my which compares between the various loans, savings and insurance schemes available in Malaysia.

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