Personal loans vs home loan redraw

man weighing up personal loan or home loan redraw

Got a large expense coming up that needs covering? Been making extra repayments on your home loan? Or maybe a personal loan might suit you instead? 

Confused? We're here to help. 

In this guide we’ll provide you with a cost comparison of each option to help you decide which you should go for.

Meet Michael and Emily 

Let’s start our comparison by using the example of homeowners Michael and Emily who are looking to add a $20,000 new kitchen to their house. Shall we crunch the numbers?

Scenario 1 - Personal loan

Say Michael and Emily take out an unsecured personal loan with the average variable rate at the time of writing of 10.26%.

Using our personal loan repayments calculator, if they paid the loan back over a 5 year period Michael and Emily’s monthly repayments would be $428 and they would pay $5,650 in interest.

Total interest paid: $5,650

Scenario 2 - Home loan redraw

By comparison, let’s see how much it would cost Michael and Emily if they dipped into the extra repayments and made a $20k redraw with $500,000 outstanding on their loan over 20 years.

Using the average variable home loan rate at the time of writing of 3.34%, by being ahead of their mortgage by $20k Michael and Emily would save $18,329 in interest for the remaining time of their home loan (20 years). 

So, by redrawing $20k and only paying the minimum repayments on their mortgage, it would cost them $18,329 in interest, compared to if they had kept the additional $20k principal paid off.  

Total interest paid: $18,329

You might be surprised to see that the home loan turned out to be the more expensive option, even though the home loan interest rate was considerably lower than the personal loan rate.

The problem with the redraw facility is that Michael and Emily wouldn’t be forced to pay it off sensibly, as they would be with a personal loan and the extra debt could sit around for 20 years.

Scenario 3 - Home loan redraw paid back with increased repayments

If Michael and Emily were savvy and decided to make up for the redraw, they would need to increase their monthly repayments by $403 over the same 5 year period as the personal loan. This would set them back on track to save $18,358 in interest on their home loan. 

In the end, the total of the additional repayments would come to $24,180: $20,000 to cover the redraw and $4,180 in interest. 

Total interest paid: $4,180

As you can see the home loan paid back over with increased repayments is the cheapest option but you’ll have to ask yourself “Will I actually make the higher repayment?”

Now that we’ve given you a cost comparison let’s delve deeper into each option…

Personal loan lowdown

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 10.26%. But if you use an asset like your car, property or expensive household item you could bring down this rate considerably, as the average sits at 7.96%. But only choose the secured loan option if you are 100% sure you can service the loan, as putting up an asset means the lender can seize it if you forfeit on the loan.
  • Unsecured: The complete opposite to a secured loan, 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. But the downside, is of course, you’ll 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. Of course, there is one major setback that comes with fixed rate loans - a breakcost fee. This could be charged if you try to pay out the personal loan earlier than the agreed timeframe.
  • Variable rate: Alternatively, you could choose a personal loan that has an interest rate that is 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.

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 budget for paying an upfront fee to the lender. Some lenders waive this fee if you’re securing the loan with an asset.
  • Ongoing fee: For providing you with the loan, on top of the interest rate charged you could be charged a monthly ongoing service fee. Make sure the low rate outweighs the cost of this fee, otherwise it might be worth looking for a loan without any ongoing fees.
  • Breakcost 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 fee.

QUICK TIP- 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.

And don’t forget to look for flexible features:

  • 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 fee free extra repayments.
  • Redraw facility: Since you’re reading this guide you’re probably pretty 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, make sure your personal loan comes with 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.

Home loan redraw lowdown

Let’s move onto the alternative option of a home loan redraw. How it works is when you have made a considerable amount of extra repayments or lump sum payments on your home loan, you could potentially dip into that amount.

For example if your regular monthly repayments were $500 and you upped them to $600, and made a lump sum payment of $1,000, at the end of the year you would have made $2,200 in extra repayments that you could potentially draw on through your redraw facility. If you made the same extra/lump sum payments for five years you would have $11,000 that you could potentially dip into.

Now let’s answer some of the frequently asked questions around redraw facilities:

How much can I redraw?

Each lender will have their own minimum and maximum redraw amounts that you’re allowed to dip into. For instance, at the time of writing one major bank had a minimum redraw of $2,000, with no maximum redraw limit.

Will I be charged a fee for redrawing?

Yes you may be charged a fee each time you redraw. That same big bank charged a $50 redraw fee for both over the counter or electronic redraws.

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.

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 or have a chat with one of our home loan negotiators who can help haggle a great deal on your behalf.

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 loan pros:

  • Personal loans generally have shorter timeframes compared to home loans, so you’ll pay off the debt sooner

Personal loan cons:

  • You will have to manage both your personal loan and home loan repayments each month
  • Personal loan interest rates are generally higher than what is offered with home loans

Home loan redraw pros:

  • Easy to manage, as you’ll have the one home loan repayment
  • 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 if your provider has no maximum redraw limit

Home loan redraw cons:

  • By dipping into the extra repayments you’ve made on your home loan, you’re undoing all those years of hard work making additional repayments
  • You 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 now? Check out the options below! 

Personal Loan Comparison Table - rates updated daily

Search promoted personal loans below or do a full Mozo database search. Advertiser disclosure.
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    Mozo Experts Choice 2021
    No Fee Unsecured Personal Loan

    Fixed

    interest rate
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    5.95% p.a.to 17.95% p.a.
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    interest rate
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    5.45% p.a.to 8.48% p.a.
    6.07% p.a.to 8.84% p.a.based on $30,000
    over 5 years

    OurMoneyMarket offer competitive low rates on loans up to $75,000, plus free extra repayments and fee-free redraw facility. Winner of Mozo's Experts Choice Unsecured Personal Loan 2021 award.

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    Mozo Experts Choice 2021
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    Unsecured, Fixed

    interest rate
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    Monthly repayment
    5.45% p.a.to 19.99% p.a.
    5.45% p.a.to 19.99% p.a.based on $30,000
    over 5 years

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    Unsecured Personal Loan

    Fixed

    interest rate
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    5.35% p.a.to 19.09% p.a.
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    over 5 years

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    Personal Loan

    Unsecured, Fixed, Excellent Credit

    interest rate
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    Monthly repayment
    6.39% p.a.to 7.49% p.a.
    6.39% p.a.to 8.19% p.a.based on $30,000
    over 5 years

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* 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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