Why this investor chose a redraw facility for his home
As part of the consolidation phase of his journey, Glenn Newbery decided to let his principal place of residence sit in a redraw facility while paying off other debts on his portfolio. How will this strategy help him succeed?
What is a redraw facility?
If your home loan has a redraw facility, you have the option to make additional payments directly into your home loan, which reduces your principal balance and the overall interest charged. Thus, you will have the ability to access these extra payments you have made at a point in time.
For example, if the minimum monthly home loan repayment you have to make is $2,000, you can decide to add an extra $100 a month. By the end of the year, you would have accumulated a total of $1,200—this amount may be may be available for you to redraw in the future.
While it is often regarded as more restrictive compared to offset accounts, redraw facilities can help investors who are looking to reduce their debts consistently. Since the money is paid directly into the loan, you will be reducing the balance of your loan consistently rather than just cutting down the interest paid in the short-term.
The strategy
Choosing to let his home sit in a redraw facility, Mr Newbery has around $2,000 worth of debt on his home as he continues to make monthly repayments on it. Once he gets too close to zero, he consequently redraws funds from his account in order to keep the loan.
The investor explained: “Once you pay it down, it closes down the loan and the money is basically locked into the property. So, if you want to get the money out, you've got to get it out through an equity loan or whatever.”
“It's sitting there in redraw and if the deal of a lifetime comes up, then, hey, it's the bank of Glenn Newbery there.
“I've got money sitting in offset accounts that would be able to close the loan and pay it off if that's what I wanted to do,” he added.
This strategy, according to him, is about leaving his money liquid. By using a redraw facility, his money is not tied up on a property as equity. Instead, it is available for him to access whenever he needs it.
After all, for Mr Newbery, property investment is all about the income that goes into your pocket rather than the size of your portfolio or its total value. This is also the reason why he aims to be debt-free by the time he retires.
He said: “The income from the portfolio is predominately going to the bank. You're not really benefiting from the income of those properties. You're benefiting from the capital gain.”
“As an investor, what I want to do is have a portfolio that's debt free at some point in time, and live off the income from those properties,” he highlighted.
Tune in to Glenn Newbery’s episode on The Smart Property Investment Show to know more about the concept of debt consolidation and how it can help you towards being financially free.
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