What is a home loan top up?

By loans.com.au

Updated on 29 Aug 2022
First published 25 May 2022

If you own a home, and have been chipping away at your home loan repayments, you might be considering renovating, going on a holiday or buying a car. A home loan top up allows you to borrow more money to fund another goal.

Home loans often have a lower interest rate than credit cards, personal loans or car loans, meaning they might allow you to borrow at a better rate.

What is a home loan top-up?

A home loan top up allows you to borrow against the home equity you have built in your property. You can use the borrowed money to fund another goal like:

Renovating
Buying a car
Overseas holiday
Paying off school fees
Paying off other debts

What is the process

Your lender will need to assess the value of the property and the amount owing on your home loan to determine how much equity you can access in your home.

For example, you have taken out a loan of $500,000 to purchase a home that was valued at $600,000 at the time of purchase. That means you paid a deposit of $100,000 at the time of purchase.

Three years later, you have paid off $100,000, leaving $400,000 as an outstanding balance.

In the time since the home was purchased, property prices in Australia have increased 20% and the home is now worth $720,000.

That means over the course of the three years, you have built up $320,000 in equity, calculated as the market value of your property ($720,000) minus the amount owed on their loan ($400,000).

As topping up requires a lender loaning more money, the lender will consider the current loan-to-value ratio (LVR) of the home loan. Usually, the maximum LVR for tapping into equity is 80% of a property's value. This means on a property worth $720,000 the potential loan value would be $576,000. Subtract the amount still owed, being $400,000, and the maximum amount the lender could add to your loan as a top up is $176,000.

This process depends on whether your property has increased in value over the course of the loan, and if you have been approved by your lender following evaluation of your credit score, serviceability and ability to pay increased loan repayments.

Calculate your equity

Top up vs refinancing

Top-up home loans are different to refinancing, and both can be great options.

Refinancing is the process of moving your home loan to a different loan or a different lender that better suits you. There are a number of reasons for doing this, but the number one reason is to save money on your loan.

If you need to free up some cash to facilitate another purchase, refinancing can help by changing to a loan with a better interest rate, or better features.

There are many benefits to refinancing your home loan, such as:

Paying less interest over the life of the loan, saving you thousands.
Reducing your loan term by a matter of years
Accessing new features, like an offset sub-account to save on interest repayments and get Visa debit card, online & EFTPOS access to your money.
Accessing equity, which is the amount you’ve paid off on your current loan.

If you are already happy with your interest rate and features of your home loan product, you may want to top-up your home loan.

Pros and cons

Pros

Home loan interest rates usually are cheaper than other types of credit.
The top-up will generally have the same loan term as the home loan, meaning the repayment will be easy to manage.
Applying for a top-up can be quicker than a new loan.

Cons

Borrowing more to invest can be complicated at tax time - always speak to a tax professional.
You are increasing your debt.
Your home loan repayments may increase.
You will pay more interest over the life of the loan.

Other factors to consider

Topping up your mortgage will most likely cost less than taking out another type of loan because home loans typically offer lower interest rates than credit cards and personal loans.

However, topping up your home loan also means you’re increasing your debt and therefore could increase your loan repayments. When considering a top up, make sure you’re comfortable with any potential changes to your repayments, and the increase in interest you will pay over the life of the loan.

It’s also important to understand using your loan to facilitate another purchase like a car or holiday, the life of that purchase could be significantly shorter than your remaining home loan term. Ensure this is compatible with your financial goals and what you are able to afford moving forward.

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