Mortgage redraw or personal loan

We often need extra cash to fund a holiday, buy that new car or maybe take on a renovation project, but laying our hands on the much need cash can open up numerous options.

Personal Loan
First, let’s find out what each of these borrowing avenues is. A personal loan is an unsecured loan usually made for the purpose of debt consolidation, holidays or the purchase of durable goods. Borrowers should consider loaning from credit unions rather than banks as they often offer a cheaper rate. Many credit unions were once only accessible to workers in a particular industry but have recently opened the gates to the general public, making their lending products widely available.

The key to cutting the cost of a personal loan is to shop around. With so many lenders and loans to choose from, you should be able to find a loan with an annual interest rate of less than 10 percent.

Redraw Facility
If you’ve made any lump sum and additional principal repayments to your home loan account, you can access those extra repayments whilst on a variable rate. A redraw facility is probably one of the most widely used loan features on the market. Redraw allows you to make additional repayments into your home loan account and then access these extra funds when necessary. A redraw facility has two key advantages; it encourages borrowers to make extra repayments, thereby saving on interest costs and it provide flexible access to funds when they are most needed.

Depending on the fees attached, a redraw facility works best for borrowers who need to redraw against extra repayments infrequently. If you plan to use your home loan as your main transaction account, a redraw facility may not be the most appropriate product.

It's worth noting that the annual interest charge isn't the only cost to consider. Watch out for any application fees and annual service or account-keeping fees. These may be charged either as a flat fee or as a percentage of the loan amount and on small loan balances in particular can significantly boost the overall cost.

With the increasing popularity of credit cards and mortgage redraw facilities, personal loans may seem out-of-date. But opting for a low-rate loan with the shortest term possible can be a big money saver, but make sure your comfortable meeting your repayments.

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