In recent times, the redraw facility has become a common feature in most home loan packages in Malaysia. While the concept is relatively simple to understand for most seasoned home buyers; but for a new home buyer, the term may be slightly confusing as it really isn’t something you deal with every day.
Find out what it is and how you would be able to take advantage of it if your property loan has this feature.
What is redraw?
It is the act of accessing excess payment you have made on your mortgage. To understand this concept, we will first have to explain what excess payment in a housing loan is.
In Malaysia, most property financing packages allow you to make excess repayment, which basically means extra payment you pay to the bank on top of the minimum loan amount you need to pay back monthly.
Say your monthly home loan repayment is RM1,000.
This month, you’ve made a repayment of RM1,100.
Your excess repayment = RM1,100 – RM1,000 = RM100.
For most property 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 housing loan.
A redraw facility is a feature that allows you to withdraw these excess payments 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, this facility would allow you to take out that RM10,000 as cash for your own use.
Obviously, by withdrawing this excess money in your loan means you’ll lose out on all the interest-saving benefits stemmed 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 money you’ve paid.
Hidden transaction charges
While the availability of redraw service undoubtedly makes excess prepayment seems like a good idea for a housing loan; one should always remember that executing the transaction usually involves fees and charges.
In Malaysia, most banks charge a standard fee of RM50 for every transaction from a conventional home loan package.
For anyone carrying a housing loan, the existence of redrawal fees is significant as it means you cannot treat your loan like a standard current account (where you can deposit and withdraw money as you like).
So before you make that excess payment, make sure you won’t actually be needing it a couple of days or weeks down the road because you could potentially be losing more money than you’ve saved by making redrawals one too many times!