Navigating Financial Options: Is Mortgage Redraw or Asset Finance Better for You?

22 February 2024

When it comes to financing big purchases or investments, homeowners often find themselves at a crossroads: should they opt for asset finance or dip into their mortgage redraw facility? While both options provide a pathway to securing funds, the choice between them can significantly impact your financial future. Let’s explore the benefits of asset finance in comparison to using a mortgage redraw, and why the former might be a more cost-effective solution in the long run.

The Drawback of Mortgage Redraw

At first glance, using a mortgage redraw facility to finance a new caravan, jet-ski or boat might seem appealing. It offers the convenience of accessing pre-paid funds and typically features a lower interest rate than a separate loan. However, this convenience masks a deeper financial pitfall: the long loan term.

Mortgage loans are structured to be repaid over a long period, often up to 30 years. When you redraw from your mortgage to cover a significant expense, you’re essentially spreading the cost of that expense over the remaining term of your mortgage. This means that a $20,000 expense could end up costing significantly more in interest over 20 or 30 years, even at a lower rate, compared to other financing options with shorter terms.

The Advantages of Asset Finance

Asset finance offers a structured way to finance your purchase over a shorter period. This approach has several key benefits:

1. Lower Total Interest Costs: By financing an asset over a shorter term, you’ll pay less in interest over the life of the loan as the principal cost of a leisure asset is generally lower than a mortgage. This is true even if the interest rate is slightly higher than your mortgage rate. This can result in substantial savings, making the overall purchase more affordable in the long run.
2. Preservation of Mortgage Progress: Choosing asset finance allows you to keep your mortgage repayments on track, maintaining the progress you’ve made in paying down your home loan and potentially saving yourself thousands in additional interest payments.
3. Dedicated Repayment Plans: Asset finance offers structured repayment plans tailored to the lifespan of the asset you’re purchasing. This means your repayments are aligned with the useful life of the asset, making financial planning more straightforward.
4. Flexibility and Control: Asset finance provides flexibility in terms of repayment options and loan structures, including fixed or variable interest rates and the choice between secured and unsecured loans. This control allows you to tailor your finance to match your financial situation and goals.

Making the Right Choice

While the allure of a lower interest rate on a mortgage redraw can be tempting, it’s crucial to consider the long-term implications of spreading the cost of a purchase over the life of your mortgage. Asset finance offers a compelling alternative, with benefits that include lower total interest costs, preservation of mortgage progress, dedicated repayment plans, and greater flexibility.

Before deciding, chat to our expert and friendly team to explore your options based on your unique financial situation and long-term goals. Remember, the right financing choice can make a significant difference in your financial health and how quickly you achieve your dream life.