- Home loan top-ups use your home equity to provide you a loan, and tend to offer lower interest rates than personal loans and credit cards.
- Managing a single consolidated loan is simpler and can offer higher borrowing limits than other forms of credit.
- Top-ups can increase overall debt and potentially lead to over-leveraging, with increased total interest costs if the loan term is extended.
- Using a top-up reduces home equity and can impact future borrowing capacity, requiring careful financial assessment and planning.
A home loan ‘top up' refers to the process of increasing the borrowing amount on an existing home loan. You’re essentially borrowing against the equity on your home. Equity is essentially the value of the home minus how much you still owe on it. Equity can come from both capital gains and how much you’ve repaid.
This approach provides a practical alternative to taking out a separate loan and is usually at a lower interest rate than personal loans or credit cards.
What Does a Home Loan 'Top Up' Involve?
The top up process involves applying to your lender, who will assess your property's current value and your ability to repay the additional borrowed amount. Many lenders offer this on variable-rate home loans provided you’ve been diligent at repaying your mortgage on time and are in a good financial position.
Borrowers often use top-ups for home renovations, purchasing a car, funding education, or consolidating debt. The top-up portion of the loan usually carries the same interest rate as your home loan. However, as you’re essentially adding more debt, your repayments will increase or your loan term will extend, and so will the total amount you pay in interest.
Differences Between a Top Up, Home Equity Loan, and Refinancing
There are several ways to unlock the equity in your home - top up, home equity and line of credit loans, and refinancing. They all seem similar but there’s a few distinct differences.
A top up stays within the existing loan
A top up is housed within the same loan and often features the same interest rate. It’s usually paid as a lump sum, rather than a revolving line of credit, and forms part of your now larger home loan repayments.
If you have an offset account, you can also opt to get it paid into there, so you only start paying interest on the amount as you withdraw it.
A home equity or line of credit loan is a separate product
It’s best to think of a home equity or line of credit loan as a separate product. It may be offered through your existing lender, but often features a different and higher interest rate.
The other key difference is it acts like a credit card in that there’s a revolving line of credit up to a pre-set amount that you draw down on as you need it. This is unlike the usual one-time lump sum paid on a home loan top up.
In some circumstances, home equity loans might have interest-only payments, with the principal paid out once you sell your home.
Home equity or line of credit loans may also be larger in size, potentially able to be used as cash for big ventures such as funding an investment property or business.
Refinancing might not allow you to cash in your equity
Refinancing involves the act of transferring your entire home loan to another lender. It is another product entirely and you might not be able to cash-in against your equity. Rather. the equity will be used to re-calculate your loan-to-value ratio (LVR) after the new lender has valued your property.
Refinancing often carries the costs of starting business with a new lender, such as a loan establishment fee, valuation fee, and other types of start-up fees. Refinancing is also often used to get a better interest rate or repayment terms, and isn’t necessarily used to cash in your equity for other ventures.
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Additional Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
5.69% p.a. | 6.16% p.a. | $2,899 | Principal & Interest | Fixed | $0 | $530 | 90% |
| Disclosure | |||||||||||
5.99% p.a. | 5.90% p.a. | $2,995 | Principal & Interest | Variable | $0 | $0 | 80% |
| Promoted | Disclosure | ||||||||||
6.04% p.a. | 6.06% p.a. | $3,011 | Principal & Interest | Variable | $0 | $530 | 90% |
| Promoted | Disclosure |
Benefits of Home Loan Top-Ups
Competitive Interest Rates
Home loan top-ups benefit from the lower interest rates of home loans compared to other borrowing options like personal loans or credit cards. This can result in significant interest savings over the life of the loan.
Simplified Management
Managing one consolidated debt with a single lender is often simpler than juggling multiple debts. This can make financial planning and budgeting more straightforward, reducing the mental and administrative burden of handling multiple loans.
Potential for Higher Borrowing Limits
Depending on the equity available in the property and the borrower's repayment history, lenders might offer a higher borrowing limit for top-ups compared to personal loans. This can be particularly beneficial for significant expenses like major home renovations.
Tax Efficiency for Investors
If the top-up is used for income-producing purposes, such as renovating an investment property or purchasing income-generating assets, the interest on the additional loan amount might be tax-deductible. This aspect can be a substantial financial benefit for property investors, but talk to a financial adviser or accountant before increasing your debt levels.
Flexibility in Loan Features
Many lenders allow borrowers to retain or choose loan features such as redraw facilities or offset accounts for the top-up amount, enhancing financial flexibility. Further, you might also be able to deposit the funds into your offset account, meaning it won’t accrue interest until you draw down.
Risks and Considerations
Increased Total Interest Over Time
While the interest rate might be lower, increasing the loan amount can significantly increase the total amount of interest paid over the life of the loan, especially if the loan term is extended.
Further, while the interest rate is lower than on other loan types, home loans are often around for 20 or more years. This significantly stretches out your repayments, and you will ultimately owe more in an interest.
Risk of Over-leveraging
Home loan top-ups can lead to over-leveraging, where the borrower takes on more debt than they can comfortably manage. This can be risky if there is a change in financial circumstances, such as job loss or interest rate rises.
Reduced Home Equity
Since a top-up involves borrowing against the equity in your home, it reduces the buffer you have in the event of a market downturn. If property values decrease, you could end up owing more than your home is worth, known as negative equity.
Potential for Higher Repayments
If the loan term is not extended, your monthly repayments may increase, which could strain your monthly budget, especially if you're not prepared for the rise in expenses.
Fees and Charges
Some lenders may charge fees for processing a top-up. These could include application fees, valuation fees, or legal fees, which can add up and should be considered in the total cost of borrowing.
Impact on Future Borrowing Capacity
A top-up on your home loan may impact your ability to borrow additional funds in the future, as lenders will consider your higher debt level when assessing new loan applications.
Many homeowners in Australia also leverage the equity in their owner-occupier property to get onto the investment property ladder. With your home equity hampered by a top up, you might not be able to realise your investment goals as quick - or you might need to rein-in your property expectations.
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