What is a home loan top-up and is it right for you?

Topping up or increasing your home loan can be a good way to access extra cash for those big ticket purchases, especially when compared to other credit options. Basically, it allows you to borrow additional funds against the equity you’ve built up in your property, which you can then use to upgrade your car, pay for a holiday and more.

How does it work?

To illustrate, let’s say you’ve taken out a loan of $400,000 to purchase a home. At the time the property was transacted it was valued at $500,000 and you had $100,000 on hand to put down for a deposit.

Five years later, you’ve paid off $90,000, leaving you with $310,000 on your outstanding balance. In the time since you purchased your home, however, property prices in Australia have risen by 10% and your home is now worth a cool $600,000. That means you’ve built up $290,000 in equity (the market value of your property minus the amount owed on your loan).

When assessing your request for a top-up, your lender will consider your current loan-to-value ratio (LVR). The LVR is generally 80% of a home’s value, so on a property worth $600,000 the potential loan value would be $480,000. Subtract $310,000 (the amount you still owe) and the maximum amount your lender could add to your loan is $170,000.

While it is possible to borrow more, this requires purchasing Lenders Mortgage Insurance (LMI). LMI protects your lender against loss in case you default on your loan, and can be quite expensive.

What are the benefits of a home loan top-up?

Increasing your home loan can be a much cheaper alternative to using a credit card or taking out a different kind of loan, given that interest rates on mortgages are considerably lower. It also has an advantage over credit cards as it allows you to borrow much more.

What’s more, a top-up can take a lot of the hassle out of managing your debts. Rather than juggling several credit accounts, you can merge them into one and pay a single interest rate on them.

What are the downsides?

Of course, topping up your home loan means taking on additional debt. No matter the amount granted to you by your lender, you can generally expect your monthly repayments to increase in size.

You’ll also have to pay off the increased amount promptly, otherwise you’ll negate the benefits of a top-up in the first place. For example, let’s say you have 15 years left on your mortgage, and you ask your lender to increase your loan so you can purchase a new car. While the interest rate might be much lower than the average car loan, the total interest paid could be higher if you spread out your repayments over the entire 15 year period. 

This will be particularly inconvenient if your car’s lifetime turns out to be shorter than the life of the loan (after all, you don’t want to be stuck paying it off ten years later when you’ve already moved onto a new vehicle). To get around this problem, ask your lender to draw up a repayment plan that will allow you to pay off the extra amount within a certain period - say, five years.

Interest paid on a $50,000 loan by type. Based on average rates as at 17 August 2020

Are there any restrictions?

For starters, top-ups generally aren’t available on fixed rate home loans, as increasing the loan amount would necessarily involve breaking the fixed loan contract.

A top-up request is also subject to your lender’s approval, so you’ll need to show you’re on solid financial footing and aren’t one to miss your monthly repayments. Your lender will also refuse your request if the reason for increasing your loan is to cover business expenses or tax bills.

Finally, be sure to ask your lender if there are any fees involved. Since a top-up is a kind of loan, you might be sprung with an application fee (though some banks waive these if you have a package home loan). And if your lender wants an up-to-date valuation of your home to calculate your level of equity, you’ll have to foot that bill too. 

For more information, check out our guide to home loan features. And if you’re looking to take out a home loan or refinance your existing one, browse what’s currently available at our home loans comparison page.