What you’ll learn about top-ups
Why top up a home loan?
A home loan top up or increase lets you borrow against the home equity you may have built in your current property. You can then use the borrowed money to fund another goal. You might:
Home loans normally have a lower interest rate than credit cards, personal loans and car loans. That’s why topping up can sound so attractive.
But before you decide to use your equity in this way, it’s important to consider the pros and cons and how it might serve the purpose you had in mind.
Is a home loan top up suitable for you?
Here are a few pros and cons to help you decide:
- Home loan interest rates are normally cheaper than most other types of credit.
- Managing one repayment can be easier than servicing several different loans.
- Applying for a top up may be simpler than applying for a new loan.
- If you choose to increase your home loan by setting up a separate loan account, it may be worth considering a home loan product with an offset account. This will allow you to transfer the whole loan balance to the offset, so you only start paying interest on the top up amount when you withdraw from the offset and only on the amount you’ve used.
- There may be tax implications if you borrow to invest – talk to your accountant.
- You are taking on more debt.
- Your home loan repayments may be higher.
- Depending on the lender, you may pay an establishment fee.
- You may pay more interest over the life of the loan.
- You may take longer to pay down your home loan completely.
How do top ups work?
Top ups – or loan increases – are only an option if you have usable equity. So what’s that?
Let’s start with ‘what is equity?’
Equity is the amount of money you have invested in your home. If you sold your house today, your equity is the money that’s left in your pocket after you repay your loan and other costs. If the value of your home increases, so does your equity.
What is usable equity?
Your usable equity is how much of your equity you can access as a loan. Your bank or lender works this out using a Loan to Value Ratio (LVR). When calculating how much equity you can use, most banks look for an LVR that is 80% of the current value of your home. This means your usable equity will be 80% of the value your home minus the current balance owing on your home loan.
|Current market value
$500,000 x 80% LVR
home loan balance
What if I want to borrow more that 80% LVR?
It may be possible to borrow more money and go beyond the 80% LVR with Lenders Mortgage Insurance (LMI). LMI insures the lender against any losses on your loan account. If you are going to use LMI, ask your bank or lender how much it will be as it can be expensive.
How much you can borrow
Every situation is unique, and your bank or lender will work with you to determine how much you might borrow. But if you want an estimate now, you just need to know three things:
Home loan type
Does your current home loan allow top ups or increases? You can’t increase the balance of a fixed rate loan, but you can add a side loan to either your fixed rate or variable rate loan. Talk to your home finance manager for more info.
How much usable equity you have in your home? If you’ve had your home loan for a while and kept up with your repayments, it’s possible. You can estimate how much of your equity you could use with our equity calculator.
Your financial situation
Can you comfortably afford the increased repayments? Keep in mind that borrowing more will involve additional repayments and potentially a different loan term. Your lender will also take your financial situation into account – including your savings, outgoings and other debt accounts – when considering whether or not approve your loan increase. Use our mortgage calculator to see what an increased loan amount could mean for your repayments. You can also use our repayment calculator to check how your loan size and repayment type affects your repayment amount. Additionally, if rates change, you can use our rate change calculator to see how the changes will impact you.
Tips for staying in control of your debt
Set your timeframe for repayment
Consider what you’re borrowing the extra money for and how long you might keep that asset. Will it increase in value over time or will it depreciate? If you use a loan increase to fund a new car, keep in mind that you may absorb a loss when you sell, in addition to the interest you pay on the money you borrowed. On the other hand, a loan increase for renovation could add value to your home. Factor these things into your decision.
When you get a home loan top up, your lender will generally recalculate your home loan repayments based on the remaining term of your existing home loan.
But if you choose to free up equity using a side loan, you may be able to choose a different loan term to your current home loan. For example, you could choose a fixed term loan and use the set repayments as a schedule to pay down the extra amount you borrowed.
Repay as fast as you can
What if you have 15 years left on your home loan and you replace the car in 5 years? In that scenario, you could be paying for a car you no longer own. Ouch!
How long you take to repay your loan can have a big effect on how much the loan will ultimately cost you. For example, if you borrow $50,000 for a new car:
|Total Interest Paid
In this instance using the top up reduces the repayment amount and the total interest paid. However, if the home loan still has 15 years and you take the whole 15 years to pay it off then the result will look like this:
|Total Interest Paid
The monthly repayment is a lot less, but the total interest paid is a lot more, more even than the 11.99% p.a.* paid on the unsecured personal loan.
While your lender only expects you to pay the lower amount, it may be in your best interest to pay more and reduce your total interest bill.
* Westpac unsecured personal loan fixed rate as at 6th April 2020 (11.99%p.a.)
** Westpac Car loan fixed rate as at 6th April 2020 (8.49%p.a.)
*** Westpac variable Rocket Repay Home Loan rate as at 6th April 2020 (4.58%p.a.)
A lower interest rate paid back over a longer period time could cost you thousands more.
Your lender may only expect you to pay the lower amount, but it may be better for you to pay more and reduce your total interest bill.
Consolidating your debt
Using your top up or increase to consolidate higher interest debts may be a great way to get your debt under control.
It works best if you also follow some simple principles:
- Check you can afford your new repayments
- Don’t take on more debt, and cancel any credit cards or other loans
- Pay off more than the minimum (if you’re able to).
If you are still struggling, ask our hardship team for help. Contact the National Debt Helpline or call 1800 007 007 for free financial counselling.
Delay your purchase
Sometimes a good option might be to wait longer and save more. Try working out what you would pay in repayments and turn that into savings. Waiting longer could have several advantages, such as:
- Borrowing less to fund your goal
- Maintaining your lifestyle without adjusting for additional debt repayments
- Keeping savings in an offset account (if you have one) to save interest charges on your home loan.
However, if you have the equity and can make increased payments, a home loan top or increase could help you get the things you want out of life.
If you need help working out what might work best for you, start by requesting a call back to talk about applying for a top-up today. You can then talk to one of the team about the ins-and-outs. They’re there to help.
Applying for an increase or top-up
Applying for a home loan increase or top-up can be easier than applying for other loans, but you will still probably need to provide your bank or lender with some updated information, including:
- Liabilities (loans)
- Assets (things you own)
- A current property valuation (We'll cover your first valuation if we need one to process your top up application.)
They will also run a credit check on you. It helps to get all this information ready before you apply to speed up the process and get an answer faster. If you don’t have the information to hand, you can still get the ball rolling now.
To sum up
- A home loan top-up lets you use equity in your house for other goals
- There are pros and cons to increasing your home loan
- Increasing your home loan will mean higher minimum repayments
- Repaying your top-up back faster could help you save interest charges
- Ready to apply for a loan increase? Request a call back