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Which should I choose? Personal loans vs home loan redraw

weighing up personal loan money or home loan redraw

Got a large expense coming up that needs covering? Maybe you're planning a dream holiday or doing some major home renovations and need the extra cash. If you've been wondering how to finance your plans, you actually have some options.

If you're having trouble choosing between a personal loan and a home loan redraw, we're here to debate the differences and help you decide which one is the best option for you.

Personal loans vs home loan redraw - what's the difference?

To really get to the bottom of the differences between your options, let's look at how the different options play out.

Imagine you're looking to do a $20,000 update to your kitchen. Here's how that ends up looking:

1) Personal loan

You choose to take out an unsecured personal loan with the average variable rate at the time of writing of 9.75% p.a. - and we're going to assume you snap up a great deal with no establishment or monthly service fees!

Using our personal loan repayments calculator, we can work out that on a 5 year loan, your monthly repayments would be $422. We can also work out how much interest you'd pay over the total life of the loan.

Total interest paid: $5,349

2) Home loan redraw

By comparison, let’s see how much it would cost you if you dipped into the extra repayments on your home loan.

Remember, this is only a viable option if you have been making extra payments on your mortgage and you have the money available to redraw. Also make sure that your home loan allows for redraw, as many lenders charge for this or restrict the ability to redraw.

For this example, let's imagine you have $500,000 home loan.

You've been working hard over the years to make extra repayments to pay things off sooner, and have contributed an extra $20,000 towards your home loan.

Imagining you're paying the variable home loan rate at the time of writing of 5.00% p.a. By being ahead of your mortgage by $20,000, you'll be saving $30,103 in interest in the long run - use our home loan extra repayments calculator to see what difference extra repayments will make.

Now, you're looking to redraw that same $20,000 from the extra payments to use for your kitchen refreshments.

By taking back out that same $20,000, you'll end up having to pay all of that extra interest on your home loan. That means the total interest on your home loan will go from $261,844 to $291,947. That's a pretty major change!

Total interest paid: $30,103

Even though personal loans may have higher rates than many home loans, they are paid off over shorter periods. It means considerable savings in interest, even though the interest rates might seem extremely different.

The other main difference is that there's no one forcing you to repay a home loan redraw. Since that money was an additional repayment to your home loan, the extra $20,000 could sit around as an extra weight on your mortgage for another 20 years. In order to make up for that extra money you had paid and redrawn, you would have to increase your monthly repayments considerably.

Now we've established the difference between personal loans and home loan redraws, let's look a little bit deeper into each option.

Should I get a personal loan?

If you decide to go for a personal loan, you’ll be applying for a completely separate banking product to your home loan. It's important to check that the personal loan is not only the right type of loan but has the features that will work for you as well. Here are some of the different types available:

  • Secured: At the time of writing the average unsecured variable interest rate was sitting at 9.75% p.a. But if you use an asset like your car, property or other valuable possession, you could bring down this rate considerably: the average secured loan interest rate sits at 8.06% p.a. Only choose this option if you are 100% sure you can make your repayments, as the lender can seize your property if you default.
  • Unsecured: An unsecured loan provides you with the peace of mind that your assets aren’t at risk in the case you are unable to repay the loan. The downside? You’ll generally be charged a higher interest rate.
  • Fixed rate: Are you the type of person that likes consistency? Then a fixed rate loan could be for you, which means over the life of the loan your repayments will remain the same, as the interest rate is locked in. These can lack flexibility or be costly to break from, so do your research.
  • Variable rate: Alternatively, you could choose a variable rate personal loan, subject to change with the market. This means you’ll benefit when rates are low but will need to budget for the chance of your provider lifting their variable rates.

Compare different options for personal loans using our personal comparison loan calculators.

Once you’ve decided what type of personal loan you’d like to go for, here are some of the fees to watch out for:

  • Application fee: When you apply for a personal loan, you may need to pay an upfront fee to the lender. Some lenders waive this fee if you’re securing the loan with an asset. These are also referred to as establishment fees. 
  • Service fee: On top of the interest rate charged, you could be charged a monthly ongoing service fee. Make sure the low rate and features of the loan outweigh the cost of this fee, as it can quickly get costly.
  • Break cost fee: A fixed rate loan may provide you with great security against rate rises but if you try to pay it off early just be mindful that some come with the slap of a high breakcost or early repayment fee.
    Extra repayment fee: Some personal loans will charge for the benefit of making additional payments - if they even have this facility. If you intend on contributing extra, make sure to check for this.

Check out what the comparison rate is for the personal loan, as this will give you an idea of how much the personal loan will cost once the headline rate and upfront and ongoing fees are merged together.

Don’t forget to look for flexible or additional features in your loan:

  • Extra repayments facility: Just like with your home loan that allows you to make additional repayments, you can do the same with your personal loan if you take out one that comes with the option of extra repayments. Make sure you check for a fee!
  • Redraw facility: You’re probably already familiar with a redraw facility, as you have one with your home loan. Well, that same facility is also available with many personal loans, which allows you to redraw on the extra repayments you’ve made on your personal loan.
  • Repayment flexibility: If you do go for the personal loan option, look for a repayment schedule that suits your pay day. The more flexible personal loans will allow you to choose between setting up your repayments either weekly, fortnightly or monthly.

Whether or not a personal loan is the right option for you will come down to your personal circumstances, but let's look at the other option.

Should I redraw on my home loan?

Home loan redraws can seem appealing, as it is simply you taking back money that you have already paid into your home loan.

Say your regular monthly repayments are $500, and you bump them up to $600 with some extra from your pay check. You score a neat little Christmas bonus and make a lump sum payment of $1,000. At the end of the year, you'll have made $2,200 in extra repayments - a handy little sum that could start your redraw facility.

If you made the same additional payments for five years, that's $11,000 that you could potentially dip into.

But redraws can be a little bit confusing, so let's answer some questions.

How much can I redraw?

Each lender will have their own minimum and maximum redraw amounts that you’re allowed to dip into. Some lenders have no minimum redraw limits or have different requirements depending on whether you withdraw at a branch or online. Make sure you read the fine print on your home loan to see what you are eligible for.

Will I be charged a fee for redrawing?

You may be charged a fee each time you redraw. Not every lender will charge for redraws, but some do, so it's worth checking.

How many REDRAWS CAN I MAKE?

Some lenders put a limit on redraws, so once again: it pays to read the terms and conditions on your home loan!

How can I access my extra repayments?

You’ll usually be able to withdraw the extra repayments you’ve made on your home loan through ATM withdrawals, EFTPOS, online banking or in branch. Refer to your lender for further information.

What are the alternatives to a home redraw?

Home loan top up: If you hold equity in your property, then an alternative option is to increase the limit of your current home loan. But just like when you redraw on your home loan, be mindful that a home loan top up will significantly hike up the interest you’ll pay in the long run.

Line of credit loan: Another option which is also based on the equity you hold in your property is refinancing your current home loan to a line of credit loan. These types of home loans provide you with a revolving loan facility that you can draw on whenever you like (to a capped amount). But keep in mind this will ultimately reduce the amount of equity you hold in your property.

To compare what’s on offer in the home loan world, punch your digits into our home loan comparison tool.

Personal loan vs home loan redraw - pros and cons

Okay, we are nearing the end of our guide, so what better way to finish than with a quick roundup of the major drawcards and setbacks of personal loans and home loan redraws:

Personal loans

Personal Loan ProsPersonal Loan Cons
Generally have shorter timeframes compared to home loans, so you’ll pay off the debt soonerWill have to manage both your personal loan and home loan repayments each month
Not limited to the lender you have your home loan with - can shop around to find a loan that suits your needs or offers more flexibility in featuresPersonal loan interest rates are generally higher than what is offered with home loans
Can secure your loan against a valuable asset, allowing you to borrow more or get lower rates on secured loans

Home loans

Home Loan ProsHome Loan Cons
Easy to manage, as you’ll have the one home loan repayment

Undoing all those years of hard work making additional repayments by dipping into your extra repayments
Since the amount you can redraw on your loan is based on your extra repayments, you could potentially borrow more than you would with a personal loan Could also pay a significant amount more in interest, due to the fact that home loans usually have a much longer lifespan than personal loans

Want to start comparing personal loans? We've got a few listed below to get you started.

Considering a personal loan? Read our guide to easy personal loans to get you started. If you're keen to see some standout personal loans, have a look at our selections of best personal loans.

Compare personal loans - last updated 18 April 2024

Search promoted personal loans below or do a full Mozo database search. Advertiser disclosure
  • Mozo Expert Choice Badge
    Unsecured Personal Loan

    Fixed

    interest rate
    comparison rate
    Monthly repayment
    6.75% p.a.to 26.95% p.a.
    6.75% p.a.to 26.95% p.a.based on $30,000
    over 5 years

    Borrow up to $50,000 unsecured. Perfect if you earn more than $22,100 p.a. and have good to excellent credit. Multi-year winner of Mozo’s Experts Choice Unsecured Personal Loan Award, 2021, 2022, 2023 & 2024^'

    Repayment terms from 2 years to 7 years. Representative example: a 5 year $30,000 loan at 6.75% would cost $35,430.23 including fees.

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  • Unsecured Personal Loan

    Fixed

    interest rate
    comparison rate
    Monthly repayment
    5.76% p.a.to 24.03% p.a.
    6.55% p.a.to 24.98% p.a.based on $30,000
    over 5 years

    Fast, easy and 100% online, this is a low cost loan with no ongoing fees or extra repayment penalties. It's perfect for savvy borrowers with great credit. If you’re over 18 and earn above $30,000, you could qualify (other eligibility criteria may apply).

    Repayment terms from 3 years to 7 years. Representative example: a 5 year $30,000 loan at 5.76% would cost $35,173.52 including fees.

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  • Express Personal Loan

    Secured

    interest rate
    comparison rate
    Monthly repayment
    14.95% p.a.to 27.95% p.a.
    29.30% p.a.to 42.8% p.a.based on $10,000
    over 3 years

    Access fast finance on loans from $5,000 to $25,000 with a Jacaranda Finance Personal Loan. Terms from 24-48 months. Check if you qualify with no impact on your credit score. Enjoy a speedy, online approval.

    Repayment terms from 2 years to 4 years. Representative example: a 3 year $10,000 loan at 14.95% would cost $14,324.71 including fees.

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  • Debt Consolidation Loan

    interest rate
    comparison rate
    Monthly repayment
    5.76% p.a.to 24.03% p.a.
    6.57% p.a.to 24.99% p.a.based on $30,000
    over 5 years

    Roll multiple debts into one loan to streamline your finances with one set of repayments and one interest rate. Competitive fixed interest rates with no monthly or early repayment fees and flexible repayment options. Easy online application and funding in as little as 24 hours (subject to approval).

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Sara Borman
Sara Borman
Money writer

Using her Bachelor of Communications in Writing, Sara has spent her professional career creating content and crafting copy. Her writing has been published in academic journals and literary anthologies in the US and Australia. She’s determined to make the world of finance accessible and loves finding a way to make money interesting to the everyday person.

* WARNING: The Comparison Rate combines the lender's interest rate, fees and charges into a single rate to show the true cost of a personal loan. The comparison rates displayed are calculated based on a loan of $30,000 for a term of 5 years or a loan of $10,000 for a term of 3 years as indicated, based on monthly principal and interest repayments, on a secured basis for secured loans and an unsecured basis for unsecured loans. This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.

^See information about the Mozo Experts Choice Personal Loan Awards

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