What is a loan top up?

Are you in need of a bit of extra cash? If you’ve built up a bit of equity in your home, you might be able to use it to increase or top up your home loan. Here’s how a loan Top Up works.

Home loan top ups

A home loan top up allows you to increase your existing home loan by borrowing against the home equity you’ve built up in your property. You can then use this money to help you achieve other financial goals, like:

• Renovating your home,
• Buying an investment property,
• Going on holiday,
• Buying a new car,
• Paying school fees, or
• Consolidating debts like credit cards, personal loans or car loans.

How top ups work

To be able to access extra funds through a home loan top up, you’ll need to have built up enough home equity first. You can do a few quick sums to work out how much usable equity you’ve got in your property.

For example, if your home is currently worth $800,000 and you’ve got an outstanding loan balance of $450,000, you would work out your equity as the difference between the value of the property and the loan amount. In this case, your equity would be $350,000. 

As a general rule, most lenders will let you borrow up to 80% of the current value of your home. Some lenders might let you borrow more, but you’d typically have to pay lenders mortgage insurance (LMI). So, to work out your usable equity you’d need to figure out what 80% of your home’s value is and subtract the amount still owing on your loan. 80% of $800,000 is $640,000. Less the amount owing gives you a usable equity of $190,000.  

It’s worth noting that not all lenders offer home loan Top Ups. Plus, home loan increases aren’t available with all loan products either, including fixed-rate mortgages. 

Top up vs refinancing

While both refinancing and topping up your home loan can allow you to tap into your home equity, there are some key differences that set these two approaches apart. 

Essentially, refinancing involves taking out a brand new home loan with your existing lender or a new lender entirely to replace your existing mortgage. Refinancing can unlock a range of great benefits like:

• Securing a lower interest rate,
• Saving on bank fees,
• Consolidating debt, 
• Tapping into equity, 
• Accessing new features and facilities, and
• Adjusting the term of your home loan.

On the other hand, a home loan top up involves increasing your existing mortgage by tapping into the usable equity in your property. A loan top up could be a good option if you’re happy with your current loan and interest rate but just need a little extra cash.

Reasons to top up your home loan

Home loan top ups can come in handy for a number of reasons, including:

• Home renovations or improvements: Increasing your home loan can allow you to tap into your home equity to fund renovations. This can help to increase the value of the property or transform it into a more liveable space.

• Debt consolidation: More often than not, the interest rate charged on your home loan is less than other types of debts, like credit cards, personal loans or car loans. If you have a few high-interest debts, it could be worth topping up your loan and putting these additional funds towards any outstanding debts. 

• Investment opportunities: From starting a new business to buying an investment property and expanding your share portfolio, sometimes it can help to have a bit of extra cash when potential investment opportunities arise. Topping up your home loan can allow you to access your equity to fund these types of investments.

• Covering other expenses: Unexpected expenses can pop up from time to time. If you don’t have the cash to cover these types of costs, you might be able to top up your home loan instead. From weddings and your children’s education to medical expenses and emergency repairs, you never know when a bit of extra cash could come in handy.

Things to consider before you top up

Before you apply to increase your home loan, it’s important to be across your financial situation and the implications of topping up your mortgage. Here are a few factors to consider before you dive in:

• Increasing debt: Increasing your home loan essentially means you’re increasing your debt. As your debt increases, so do the interest charges. Depending on the terms you agree to as part of your top up, the term of your home loan could be extended too, so you might end up paying off your mortgage for longer than you initially anticipated. 

• Higher mortgage repayments: When you increase your mortgage, there’s a good chance you’ll be hit with higher minimum loan repayments. With this in mind, it’s important to make sure you’re able to comfortably service an increase in repayments.

• Additional fees: Depending on your lender, you could be hit with an application fee to top up your home loan. Plus, if your lender requires a current property valuation to calculate your loan to value ratio (LVR), chances are you’ll have to foot the bill for this expense too.

• Potential tax implications: Whether you’re borrowing to buy an investment property or you’d like to top up your investment loan, you could be opening yourself up to potential tax implications. In this case, it could be worth chatting with a tax accountant for some expert advice based on your financial situation. 

At Unloan, we don’t currently offer home loan top ups, but this feature is coming soon. In the meantime, you can check out how much you’d stand to save when refinancing with an Unloan home loan. 

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Applications are subject to credit approval, satisfactory security and minimum deposit requirements. Full terms and conditions are found on our Unloan Terms and Conditions. Modified Terms and Conditions will be set out in our Notice of Variation Agreement, if you are approved.

This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice.

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