Our lives are always changing and at times we need to borrow money to achieve our goals. One way to gain access to money is to get a home loan top up or increase, which is likely to have a cheaper interest rate than other loans, such as credit cards, personal loans and car loans.
A home loan top up or increase is a way to borrow extra money against your current home. If you have equity in your home and the ability to make extra repayments, your lender may increase your existing home loan limit to allow you to pay for renovating, a car, a holiday, school fees, extra cash or whatever you choose.
What is the difference between getting an increase and refinancing?
A refinance can achieve the same outcome as an increase or top up. However, a refinance is getting a new loan, usually from a different lender.
By how much can I increase or top up my home loan?
Your home loan top up or increase is dependent on 3 things:
1. Does your home loan allow increases?
You may need to check with your lender if your current loan type allows top ups or increases.
2. How much home equity is in your property?
Home equity is the difference between how much you owe on your current home and the current market value.
How much you owe can be determined by checking your latest bank statement or looking at your online banking for your current outstanding balance.
If you apply for a top up, your lender may require a formal valuation (at your expense) to be conducted to determine the current market value of your home. You can get an indication of how much your current home is worth by talking to local real estate agents or accessing an online price estimator like Westpac’s Property Market Research.
The market value of your property less your outstanding loan balance is your home equity. Let’s say you have a home worth $500,000 and a home loan amount of $200,000, then your home equity is $300,000. That’s approximately how much you would realise from selling your home less any costs. This is not the amount your lender will lend you.
Your lender will apply a Loan to Value Ratio (LVR) to determine the amount they may lend you. The LVR is typically 80% of the market value of your home. In our example, a home with a market value of $500,000 multiplied by 80% has a potential loan value of $400,000. Deduct the outstanding balance on your home loan of $200,000 and your lender may be able to increase your loan amount by up to $200,000.
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 you lender how much it will be as it can be expensive.
3. How much can you afford to repay?
If you increase the amount you owe on your existing home loan, your repayments will increase. It is important that you can afford the new repayment amount.
To get an indication of what your extra repayments may be, use a repayment calculator like Westpac’s Mortgage Repayment Calculator. Enter the amount of the increase, the remaining loan term on your existing home loan and your current interest rate. You should be able to obtain the remaining loan term and interest rate from your last bank statement or on your lender's internet banking.
When you apply for your increase your lender will want to confirm your financial situation to know if you can afford the extra repayments. They will ask you to confirm the details they have on file and for documentation verifying your income, savings, assets (things you own) and liabilities (loans). They will also run a credit check on you.
If you have the equity and can afford the home loan repayments, then a home loan increase or top up may be the right solution for you. Before jumping in and applying there are a few other things you should be aware of.
Is a home loan top up or increase right for you?
Here are a few pros, cons and tips for you before you decide.
- Usually home loan interest rates are cheaper than other loans such as credit cards, personal loans and car loans.
- It may be easier to manage one repayment amount rather than several for different loans.
- Interest will only be charged on your outstanding balance, not the limit you have in place.
- The application process may be simpler than applying for a separate loan.
- If you are borrowing for investment purposes such as an investment property, there may be tax implications that should be discussed with your accountant or tax consultant.
- You are taking on more debt.
- Your home loan repayments may be higher.
- Depending on the lender, you may have to pay an establishment fee.
- You may pay more interest over the life of the loan, particularly if not paid off promptly.
Match the life of the loan with the life of the asset.
This means you should pay off your debts before the thing you buy becomes worthless or gets replaced.
When you get a home loan increase or top up, your lender will generally recalculate your home loan repayments based on the remaining term of your existing home loan.
If the thing you buy is a car, it may wear out or you may replace it many years before the term of your home loan expires. You could still be paying for the car that you no longer own.
If what you purchase is something more ephemeral like a holiday, you would probably want it paid off before your next big holiday.
Pay off your loan as fast as you can.
Say I use my home loan top-up to purchase a nice new car that cost $50,000. Let’s compare different loans using the Westpac Mortgage Repayment Calculator with a variable product type:
|Loan||Term||Interest rate||Monthly repayment||Total Interest Paid|
|Car loan||5||8.49% p.a.**||$1,026||$11,535|
|Top up/Increase||5||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||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.)
If the purpose of your top up or increase is to consolidate higher interest debts, this can be a good strategy. The lower interest rate and potentially lower repayment amounts may make it easier for you to get control of your finances.
Make sure you can comfortably make the new repayments within your budget.
Cancel the loans and credit cards you have paid out and do not take out more debt.
Attempt to pay off more than the minimum your lender requires.
Delay your purchase
For some people it may be possible to delay the purchase of what you intend to spend the loan funds on.
This will allow you to save more, meaning you will not have to borrow as much.
If you save the amount you should be repaying regularly, when the time comes to borrow you will not have to cut back on any of your regular spending to make the repayments.
You put your savings into a redraw facility or offset account on your home loan, you will be saving yourself interest and may own your home sooner.
If you have the equity in your home and the ability to make increased payments, then a home loan top or increase can really help you get the things you want out of life. Visit your lender's website or contact your lender directly to arrange your increase.
Things you should know
The information contained within this page is general in nature. It serves as a guide only and does not take into account your personal financial needs. Before you act on this information you should seek independent legal and financial advice. Approval subject to credit criteria. Fees, charges, terms and conditions apply.