What is a home loan top up?

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on March 28, 2022 Fact Checked
What is a home loan top up?

Topping up your home loan can be an effective way to finance renovations or a car, or consolidate debt - but how does it work?

A home loan top up allows you to borrow additional funds against the equity you’ve built up in your property. Depending on how much equity you have, your individual financial circumstances and your lender, you may be able to increase the size of your home loan by up to 80% of its value.

In this article, we’ll look at:


Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for owner occupiers.

Lender

Variable
More details
UNLIMITED REDRAWSSPECIAL OFFER
  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
UNLIMITED REDRAWSSPECIAL OFFER

Smart Booster Home Loan Discounted Variable - 2yr (LVR < 80%)

  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
Variable
More details
AN EASY DIGITAL APPLICATION
  • No ongoing fees - None!
  • Unlimited additional repayments
  • Easy online application, find out if you're approved quick!
  • Redraw- Access your additional payments if you need them
  • Use the app to get loan insights to help you pay off your home loan faster
AN EASY DIGITAL APPLICATION

Neat Variable Home Loan (Principal and Interest) (LVR < 60%)

  • No ongoing fees - None!
  • Unlimited additional repayments
  • Easy online application, find out if you're approved quick!
  • Redraw- Access your additional payments if you need them
  • Use the app to get loan insights to help you pay off your home loan faster
Variable
More details
100% FULL OFFSET ACCOUNTNO APPLICATION FEE OR ONGOING FEES
  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services
100% FULL OFFSET ACCOUNTNO APPLICATION FEE OR ONGOING FEES

Low Rate Home Loan - Prime (Principal and Interest) (Owner Occupied) (LVR < 60%)

  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services
Variable
More details
NSW/VIC/SA METRO & INNER REGIONAL AREAS$5000 CASHBACK. T&Cs APPLY.
  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services
NSW/VIC/SA METRO & INNER REGIONAL AREAS$5000 CASHBACK. T&Cs APPLY.

Variable Home Loan (Principal and Interest)

  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services

Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to be made on variables as selected and input by the user. All products will list the LVR with the product and rate which are clearly published on the Product Provider’s web site. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. *The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of May 26, 2022. View disclaimer.


How does a home loan top up work?

Topping up your home loan is essentially increasing the amount of your home loan to borrow extra money. Generally, the amount by which you can increase your home loan will depend on how much equity is available in your property. As you pay off your home loan, you are increasing your slice of the pie, and in turn generating equity.

Top up scenario

A young couple have taken out a loan of $500,000 to purchase a home.

At the time the property was purchased it was valued at $600,000 and the couple had $100,000 available on-hand to put down for a deposit.

Three years later, the couple have paid off $100,000, leaving them with $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, the couple has 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).

The couple decide after watching one too many episodes of ‘The Block’ to tackle a kitchen renovation project estimated to cost approximately $30,000.

As topping up requires a lender loaning more money, the lender will consider the current loan-to-value ratio (LVR) of the home loan. Generally, the maximum LVR for tapping into equity is set at 80% of a home’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 for a kitchen renovation is $176,000.

While it is possible to borrow more, Lenders Mortgage Insurance (LMI) would be required in this scenario to protect the lender.

Benefits and risks of topping up your home loan

Benefits

Topping up your home loan can be a cheaper alternative to using a credit card or taking out another loan given that interest rates on mortgages are likely lower than personal loans and other types of credit.

It also allows you to borrow more money based on the equity of your home. Equity can be built by physically doing nothing and just sitting on your property as the market increases in value.

Topping up your home loan with your current lender can take out a lot of the guesswork, as rather than juggling several credit accounts, you can merge them into one and pay a single interest rate on them.

Many variable loan types will allow you to make extra repayments without penalty to pay off the top up portion sooner.

Risks

Topping up your home loan in essence means taking on additional debt. With this in mind, it’s important to note that no matter the amount granted by your lender, you can expect your mortgage repayments to increase in size.

With larger mortgage repayments and the nature of your loan being fixed or variable, you may pay more interest over the life of the home loan for taking on additional debt. This may also mean taking longer to pay down your home loan completely.

There is also the risk that property prices head south or interest rates head north, eating into your equity. This is why lenders generally require a maximum LVR of 80% before tapping into equity - consider that 20% your ‘buffer zone'.

Savings.com.au’s two cents

Depending on your goals and financial circumstances, topping up your home loan can be an efficient way to finance renovations, consolidate debts or even purchase a new car using the equity available on your property.

While offering the convenience of avoiding another loan like a personal or car loan, it’s important to note topping up your home loan will result in higher minimum repayments on your mortgage as you are increasing the loan amount.

Top up requests are subject to lender approval, therefore you’ll need to show you’re on solid financial footing, while showing you are able to consistently make repayments.


Image by Karolina Grabowska via Pexels 

Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered. Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site. Savings.com.au, yourmortgage.com.au, yourinvestmentpropertymag.com.au, and Performance Drive are part of the Savings Media group. In the interests of full disclosure, the Savings Media Group are associated with the Firstmac Group. To read about how Savings Media Group manages potential conflicts of interest, along with how we get paid, please visit the web site links at the bottom of this page.

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Jacob Cocciolone joined the Savings team in 2021 as a Finance Journalist. Driven by a passion for keeping Australians up to date with the latest financial news and trends, his areas of interest include financial technology, investing, property and motoring.

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