Home loan top-ups could be the answer if you’re looking for a way to access extra money. For example, you could use the money to finance home improvements, consolidate your debts, or for any other purpose, such as investments.
This article will explain how home loan top-ups work in Australia.
What Does Topping Up Your Home Loan Mean?
When you top up your existing home loan, you can borrow additional funds against the usable equity you’ve built up in your property.
As the name indicates, a top-up implies that you can borrow additional funds over and above your home loan. This is typically possible when your financial situation has changed since first taking your loan, and your home has increased in value.
So, based on how much equity you have built, your financial circumstances, and the lending terms of your bank or credit provider, it may be possible for you to increase your home loan amount up to 80% of its value.
Reasons to Top-Up Your Home Loan
Topping up your home loan enables you to borrow against the built-up equity in your home. This extra money can be used towards your objectives, for example, to consolidate debts, make home improvements, purchase a new car, pay your child’s school fees, etc.
Moreover, the top-up option would work cheaper than credit cards, personal loans, and/or car loans, as they typically have a lower interest rate. They are therefore considered a cost-effective way to access extra cash.
Similarly, based on your objectives, suppose you’re looking to purchase an investment property. In that case, a home loan increase can help you put down a deposit to enter the investment property market. Home loan increases or ups can also give you access to more money to buy shares and grow your wealth.
What is the Difference Between Top-Up and Refinance?
There are a few key differences between home loan top-up and refinancing your home loan.
- Switching vs. Home Loan Increase: Refinancing involves moving or switching to a new home loan. In doing so, you have the flexibility to access a lower interest rate or different terms with your current lender or a new one. It is like a new home loan, where you close off your existing mortgage and open a new one. In contrast, topping your home loan involves increasing your existing home loan by borrowing the usable equity in your home.
- Accessibility: Another difference is that most lenders do not allow top-ups on fixed-rate home loans. In such scenarios, where top-ups do not qualify, refinancing may be a suitable option.
Are there Similarities Between Top-Up and Refinance?
Yes, they do share some common features. Here are some similarities between refinancing and a loan top-up:
- Reapplication and Reassessment: Where lending criteria require, you may have to revisit the process right from the application stage for a top-up, as is done for refinancing. Similarly, your lender will most likely reassess your capability to make monthly repayments and overall survivability.
- Additional Fees: In both cases - for loan top-ups and refinancing- you may incur additional costs like ongoing fees and an establishment fee.
- Purpose: The amount from your top-up can be used to finance expenses like home improvements, purchase of shares, investment property deposits, etc., which refinancing enables.
Can You Get a Home Loan Top-Up?
Lending criteria apply, and when in doubt, your lender will be the best person to guide you if you are eligible for a home loan top-up.
When reviewing your application, lenders usually take into consideration the following factors to determine your eligibility:
- Eligible Home Loan: Most banks and lenders allow home loan top-ups on variable home loan products. The same may not be possible with a fixed-rate loan. Some banks may require you to break the contract to access a loan increase. Some may want you to open a separate loan account to increase your fixed-rate loan. Since credit criteria vary, your lender will help you determine if you are eligible.
- Usable Equity in Your Home: If your home loan is eligible for topping up, the amount of loan increase you’ll be allowed will depend on how much equity you have built in your property and your current financial situation. If your property valuation increased since purchasing your home, or you have made extra repayments, the outstanding balance of your loan may be lesser. As a result, you may have more useable equity for a loan increase. Where your Loan-to-Value Ratio (LVR) is more than 80% of your property valuation, you may be required to pay Lender’s Mortgage Insurance (LMI).
- Proof of Income: Your lenders will assess your income documents, including your borrowing power, ability to afford interest repayments, and other additional repayments associated with this change. For example, some banks charge an establishment fee of as much as $300 and a small monthly loan service fee.
- Credit History: You should be regular with your repayments to qualify for a loan increase. In most cases, your eligibility will depend on your repayment history.
- Additional Repayments: If you are ahead on your repayments, having made additional repayments to an eligible loan account, your lender may allow you to access top-up funds.
- Top-Up Loan Limit: Some banks require a minimum loan amount for the top-up. In some banks, the minimum top-up is $20,000, while the maximum is 90% of the property’s market value.
- Purpose of Extra Funds: Lending criteria apply for a home loan top-up request, and your financier will assess whether you have a solid financial footing. Your lender will factor in your reason for a loan increase. You may get refused for reasons such as paying off business expenses or your tax bills.
Pros & Cons of Topping Up Your Home Loan
Pros of Topping Up Your Home Loan
- Cost-effective than Other Credit Products: Loan increases or top-ups usually work out cheaper than using a credit card or taking out another loan. This is because mortgage interest rates are typically lower than personal loans and other types of credit. In addition, you can also borrow more than you would be able to on a credit card.
- Greater Borrowing Power: As the market value of your property increases, so does your equity, without you having to put in any effort. One of the primary benefits of a home loan top-up is that you can borrow more money depending on the amount of usable equity you have in your home.
- Manageable: Compared to switching lenders, topping up your home loan with your current lender is more convenient. You can merge your different credit accounts and have the total interest paid in one instance instead of juggling several credit accounts. Moreover, you’ll have to pay interest only on the funds you draw down, not the increased home loan limit.
- Extra Repayments: Where you have a variable rate home loan, you may be able to make extra repayments without paying penalties as you would with some fixed interest rates.
Cons of Topping Up Your Home Loan
- Higher Minimum Repayments: With a home loan top-up, you are taking on additional debt. Regardless of the loan amount your lender offers, your monthly loan repayments will increase.
- Longer Loan Term: Depending on the type of loan - whether a variable home loan or a fixed loan - you will most likely pay more interest over the entire loan term. Moreover, the additional loan means you may take longer to pay your home loan and attain full ownership.
- Negative Gearing: If property prices crash and/or interest rates head zoom up, it could affect the amount of usable equity you have in your home. For this reason, most lenders safeguard their interests by insisting on a maximum LVR of 80%. The remaining 20% offers protection against potential risks.
- Tax Implications: Noteworthily, if you’re an investor, you could seek a loan increase or top-up. However, there may be certain tax implications. Therefore, seeking independent legal advice is advisable before applying for a loan increase on your investment home loan and owner-occupied home.
How to Top-Up Home Loan?
There are five simple steps that you can follow to top up your home loan. They are as follows:
Step 1: Assess Home Loan Type
First, check if your existing home loan is eligible for top-up requests. Most banks and lenders offer home loan increases on variable home loans. However, to access more credit, you may need to increase your home loan with a supplementary loan if you have a fixed-rate loan. Speak to your lender on available pathways to access a loan increase on your fixed-rate loan.
Step 2: Calculate Your Equity
To calculate your usable equity, minus your current home loan balance from 80% of the estimated market value of your property. If your new LVR exceeds 80%, your lender will tell you to take out mortgage insurance.
Step 3: Prepare Your Documents
Organise your pay slips, bank statements, liabilities (loans), assets, current property valuation and other documents to show your financial situation. This will help your lender assess your ability to make extra repayments and improve your chances of qualifying for a home loan.
Step 4: Examine Your Loan History
Lenders thoroughly study your repayment history before approving your loan increase application. Therefore, be regular and organised with your repayments before applying for a home loan top-up.
Step 5: Contact Your Lender
With the spadework in place, you should now contact your lender and apply for a top-up home loan.
You could access Joust’s Concierge Services for expert guidance in connecting with reputed Aussies lenders and brokers who will help you with a home loan solution that suits you.
Top Up Home Loan Example
Sally purchases a home for $600,000 with a 20% deposit. Thus her loan amount is $480,000.
After some years, the market value of Sally’s home increased to $650,000 while her loan shrunk to $400,000. As a result, she now has $250,000 in equity (i.e., the current value of the home value minus the loan balance).
Sally needs to borrow $40,000 to carry out home renovations. The bank agrees and tops her home loan from $400,000 to $440,000.
Getting your calculations right can be the difference between home loan top-up success or not.
Joust’s online calculators can help you calculate your borrowing power, how much refinancing can help you save on home loan interest rates and more.
Is a Home Loan Top-Up a Good Idea?
When you top your home loan, you’re increasing your debt. Moreover, it may take longer to repay your home loan fully.
In a nutshell, while most home loans have lower interest rates than car loans or personal loans, a top-up makes sense if you can pay off the extra debt as soon as possible. Or, you’ll end up paying more interest.
Even here, depending on whether it’s a fixed or variable home loan, you may have to break the fixed loan contract and pay the break fees and other costs.
In addition, you would need to check with your lender if there are any fees, for example, an application fee and how much they are. You could try negotiating a waiver if you have a package home loan). Also, if your lender wants to revalue your home for calculating usable equity, you may have that bill to clear too.
Finally, there’s always a risk that your property value may drop and affect your equity. For this reason, you will have to show a deposit of at least 20% before tapping into equity.
Alternatives to Topping Up Your Home Loan
Here are some alternatives you could consider instead of increasing your home loan.
- Refinance: You could try moving to a new loan or switching lenders to get a better deal. Though slightly more complicated than a top-up, you could gain access to a loan with lower interest rates that will help you save more money while reducing your monthly repayment.
- Line of Credit: This option lets you access extra money anytime you want, up to your credit limit. It’ll be a separate loan account, and the repayment will be different too.
- Home Equity Loan: Similar to a home loan increase, a home equity loan allows you to borrow against your equity. Your equity will be used as security.
- Personal Loan or Car Loan: These come with shorter loan terms. And, although they carry higher interest rates, you’ll pay less interest overall.
- Credit Card: Based on your credit limit, you may be able to access a lower amount of funds. Also, it’s advisable to pay credit card loans off as quickly as possible if used for major purchases because they typically charge very high-interest rates.
What to Consider Before Topping Up Your Home Loan?
Here is a list of questions you should ask yourself before topping up your home loan:
Am I Eligible for a Top Up?
Most variable home loan products are eligible for a top-up if you have usable equity. Therefore, you must check the amount of usable equity you have in your property. (Usable equity = 80% of the market value of your proper - loan balance).
Also, if you have a fixed interest rate, your lender would be able to explain the available options.
How Much Loan Increase Can I Access?
Your eligibility will depend on several factors that may vary from lender to lender. Nonetheless, your financial situation, usable equity and repayment history will certainly impact the number of top-up funds you can access. Your lender will be able to guide you on the amount you can increase your home loan.
Can I Manage the New Repayment Amount?
Topping up your home loan implies more borrowing and a rise in monthly repayments. Moreover, depending on your lender and eligible home loan, you may incur additional costs towards establishment fees and other charges. Similarly, it also means that your usable equity in your property reduces. Therefore reassess your budget before moving ahead with a loan increase.
What is My Purpose for Topping Up?
You could use the top-up for consolidating your debts into a lower home loan interest rate, investing in shares, buying a car, paying school fees and medical bills, or putting a deposit on a new property. However, you cannot use it to clear business expenses or tax bills.
Are there Tax Implications?
There may be potential tax implications if you’re looking at the top-up funds for buying an investment property. You should seek independent legal advice or speak to your accountant before topping up.
Joust, a Specialist Home Loan Marketplace
Top-ups can be a great way to access extra funds when you need them. But If you’d prefer to refinance and take out a new home loan with a different lender, you may find that the interest rates and fees are lower than your current home loan.
Our Instant Match can help you compare home loans from various Aussie lenders to find the right home loan for your needs. It is quick and easy to use, and you’ll receive personalised home loan offers within minutes.
What Happens to Your Home Loan Repayments When Topping Up?
A home loan top-up means that you have taken on additional debt. Therefore, regardless of your lender’s offer, you should expect a rise in your overall monthly repayments.
Can You Top-Up a Fixed Rate Home Loan?
Typically, top-ups are not available on fixed-rate home loans. This is because a loan amount increase would require breaking the fixed loan contract. If you still go ahead, you may incur additional expenses related to early adjustments.
However, some lenders may offer to fund a home loan top-up as a variable rate split loan portion. In this scenario, while your fixed loan stays the same, you’ll get a new loan portion for the top-up amount. The repayment for this portion though separate will be on the same date as your existing loan.
In sum, if you have a fixed interest rate, it’s better to speak to a lender directly to discuss your options.
Does Topping Up Affect the Length of Your Home Loan?
Having taken on an additional top-up, your loan balance increases. Therefore, paying down your home loan and getting full home ownership may take longer.
How Many Times Can you Top-Up a Loan?
For starters, when you take a home loan top-up, you should pay off the increased amount promptly. If not, it defeats the purpose of a top-up, as the total interest paid will be much higher.
Also, most lenders set caps on the amount of equity you can access. While some will let you borrow up to 80% of your property’s value, top-up requests are subject to lenders’ approvals.
How Long Does a Loan Top-Up Take?
Firstly, you must apply for a top-up home loan and get approved. In most cases, once you qualify, you’ll get access to the additional funds through a redraw facility. This will allow you to withdraw funds as per your requirement.