What is Home Loan Cashback or 'redraw', exactly?

Friday, February 28, 2014

What do they mean, cash...back?

Home Loan Cashback or Home Loan Redraw is often cited as an attractive feature of a prospective home loan by lending advertisers – but what does it actually mean and how does it work? What is ‘cashback’, exactly?

Put simply, cashback is a practice that banks and financiers use to reward early repayments on home loans. It does this by allowing you access to money you’ve already paid toward your home loan after you’ve paid it. Which is to say, you can get your cash back.


What does that mean, in practical terms?

Well, to give you an example, if your home loan agreement says you only have to pay $350 per week but you decide to pay $450 per week instead, your bank will hold on to that extra $100 you’re paying each week and you can get it back whenever you want or need it (within the rules of your home loan, of course – for example, most lenders have ‘minumum amounts’ you can redraw).

So, why use cashback? Well, to continue our example, if you pay $450 per week on your mortgage for eight weeks, only to later decide you want to go on a holiday – you can grab that extra $800 back out of your home loan and spend it on that trip down the coast. Or, heaven forbid, you might be faced with a family emergency and need the money in a hurry. Either way, it’s yours.

Basically, cashback allows you to use your home loan as an additional savings account. Except, instead of just sitting in your account, your additional savings are working for you by paying off your mortgage.

The only caveat is that cashback tends to be exclusive to variable rate home loans. It’s not often a feature of fixed rate mortgages. It’s up to you to decide whether it’s something that is necessary for your repayment plans.