- A home loan top up lets you borrow additional funds by tapping into the equity built up in your property.
- The ability to top up depends on how much equity you have - lenders typically only permit this if your LVR remains around 80% or less.
- While convenient, topping up increases your debt and may raise your repayments or extend the time you're in debt.
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.
How does a home loan top up work?
Topping up involves increasing the amount of your existing 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 repay your loan, and as your property’s value grows, your share of the home increases, building the equity you can potentially draw on.
Here's an example scenario to understand how a home loan top up works
A young couple has 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 has paid off $100,000, leaving them an outstanding balance of $400,000.
Since the home was purchased, property prices in Australia have increased by 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 their property ($720,000) minus the amount owed on their loan ($400,000).
The couple decided 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 to loan 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.
Before increasing your loan balance, it's worth checking how your current deal stacks up. The table below showcases some of the lowest interest rates available to owner occupiers.
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Extra Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
5.94% p.a. | 5.98% p.a. | $2,978 | Principal & Interest | Variable | $0 | $530 | 90% |
| Promoted | Disclosure | ||||||||||
5.89% p.a. | 5.80% p.a. | $2,962 | Principal & Interest | Variable | $0 | $0 | 80% |
| Promoted | Disclosure | ||||||||||
5.99% p.a. | 6.02% p.a. | $2,995 | Principal & Interest | Fixed | $0 | $0 | 60% |
| Promoted | Disclosure | ||||||||||
5.93% p.a. | 5.93% p.a. | $2,975 | Principal & Interest | Variable | $0 | $395 | 70% | Disclosure |
Benefits and risks of topping up your home loan
Benefits
- Cheaper vs other forms of credit - Topping up your home loan can be a cost-effective alternative to using a credit card or taking out a personal loan, as mortgage interest rates are typically lower than most other types of credit.
- Borrow more money - A top-up lets you borrow more using the equity you've built in your home - equity that can grow simply through market value increases as well as through paying down your loan.
- Simplifies finances - Sticking with your current lender can streamline the process. Instead of managing multiple credit products, you consolidate your borrowing under one loan and pay a single interest rate.
- Option to repay top up faster - Many variable loan types will allow you to make extra repayments without penalty to pay off the top up portion sooner.
Risks
- Higher overall debt - A top-up increases your total borrowings, which means your mortgage repayments will rise. It's important to assess whether your budget can comfortably absorb that increase.
- More interest over time - Because you're borrowing more, and often over the remaining term of your home loan, you may end up paying more interest overall. It can also extend the time it takes to repay your mortgage in full.
- Exposure to market and rate changes - If property prices fall or interest rates rise, your equity can shrink. This is why lenders generally require a maximum LVR of 80% before tapping into equity, because that 20% acts as your buffer against market fluctuations.
Savings.com.au's two cents
While offering the convenience of avoiding taking out another loan, like a personal or car loan, it's important to note that topping up your home loan may result in higher minimum repayments on your mortgage and extend the time you're in debt, as you are increasing the loan amount.
Top up requests are subject to lender approval, therefore, you'll need to show you're on a solid financial footing while showing you are able to make repayments consistently.