How do home loan top-ups work?
If you've built up equity in your home, you may be able to draw out cash using a home loan top-up.
Topping up or increasing your home loan can help you draw out funds for large purchases at a lower interest rate than some other finance options. It can leverage the equity in your home and provide you with a single, easy-to-manage repayment rather than multiple credit accounts.
What is a home loan top-up?
A home loan top-up is an increase to your existing home loan. It allows you to borrow more by using the equity in your home, or the difference between your remaining home loan and the current value of your property.
Here's how it works:
Let's say you purchased your property for $700,000 with a 20% deposit, meaning your original home loan was $560,000. After a few years, you've paid this amount down to $480,000. Meanwhile, your property has increased in value and is now worth $800,000. You would have built up $240,000 in equity.
A home loan top-up will increase the amount of your home loan to draw on this equity. In general, lenders will only increase your home loan up to 80% of the value of your home. In the example above, that means your home loan would increase from $480,000 to $640,000, giving you $160,000 to draw out in cash.
The money you access through a home loan top-up can be used for any purpose. You could use it as a deposit for an investment property, to buy a car, to pay off debt or to do non-structural renovations (structural renovations usually require a construction loan). You'll only be charged interest on the amount you use.
Keep in mind that increasing your home loan can increase your repayments and the amount of time it takes to pay off your mortgage. This means you'll be paying more interest in the long term.
How do I get a home loan top-up?
- You need to determine if your home loan is eligible for a top-up. Many fixed rate home loans don't allow increases. Speak to your lender to determine if you're eligible.
- Then your lender will assess your serviceability, or your ability to meet the larger repayments. They'll also perform a valuation on your home to determine its current value. This will determine your current loan-to-value ratio (LVR).
- You'll likely have to go through an application process to increase your home loan, even though the loan account will remain the same. Some lenders charge an establishment fee for home loan top-ups, so be sure to ask your lender about any fees involved.
- If you apply and are approved, you'll be given access to the additional funds through a redraw facility which allows you to withdraw the extra cash as you need it. You may even have the option of using a split facility to place the extra funds in a separate loan account so you can better keep track of the new debt.
What are the benefits?
Using a home loan top-up can be a more efficient way to finance purchases than applying for a personal loan, car loan or credit card. Home loans have lower interest rates than most other finance options. Moreover, a home loan top-up will keep all your debt in one account with one repayment, which can make it much easier to manage. Finally, as mentioned above, you'll only be charged interest on the funds you choose to use.
What are the risks?
Increasing your home loan amount means you'll also be increasing your monthly repayments. You'll need to reassess your budget to make sure you can manage the new repayment amount.
Increasing your mortgage can also lengthen your loan term. By taking longer to repay your home loan, you'll be increasing the amount of interest you pay.
And, while the majority of home loans carry lower interest rates than car loans or personal loans, carrying the debt over a longer term means you'll end up paying more in interest. It's wise to try to pay down the extra debt as quickly as possible.
What are the alternatives to a home loan top-up?
The alternatives to a home loan top-up will depend on what you're using the funds for. You could:
- Apply for a personal loan or car loan instead. While these carry higher interest rates, they also come with shorter loan terms, meaning you'll pay less in interest overall.
- Consider a line of credit or home equity loan. This functions much like a home loan increase, giving you access to funds based on the equity in your home. A line of credit differs in that it's a separate loan account, requiring a separate repayment.
- Depending on the size of your purchase you could also apply for a credit card. However, credit cards generally carry very high interest rates relative to home loans, and, depending on your credit limit, may offer a lower amount of funds for your purchase. If you choose to use a credit card for a major purchase, you'll need to ensure you're disciplined to pay it off as quickly as possible.
If a home loan top-up isn't right for you, consider switching to a new lender to get a better deal
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