Looking to renovate your house, buy a new car or pay off your high interest credit cards? Increasing or topping up your home loan might give you access to the money you need. But how does it work? What are the pros and cons and how much might you borrow? Let’s take a closer look.
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.
Here are a few pros and cons to help you decide:
Top ups – or loan increases – are only an option if you have usable equity. So what’s that?
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.
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 |
$400,000 |
| Current outstanding home loan balance |
$250,000 |
| Usable equity | $150,000 |
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.
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:
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.
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.
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.
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:
| Loan | Term | Interest rate | Monthly repayment | Total Interest Paid |
|---|---|---|---|---|
| Unsecured | 5 years | 11.99% p.a.* | $1,112 | $16,718 |
| Car loan | 5 years | 8.49% p.a.** | $1,026 | $11,535 |
| Top up/Increase | 5 years | 4.58% p.a.*** | $934 | $6,038 |
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:
| Loan | Term | Interest rate | Monthly repayment | Total Interest Paid |
|---|---|---|---|---|
| Top up/Increase | 15 years | 4.58% p.a.*** | $385 | $19,218 |
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.
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:
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.
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:
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 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:
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.
Combining different personal debts into your home loan may make it simpler to manage repayments, but you need to make sure it’s appropriate for you.
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This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness of the information to your own circumstances and, if necessary, seek appropriate professional advice. Credit provided by Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian credit licence 233714.