Should you consider a top-up mortgage?

Published on June 13th, 2020
  Written by 
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As a homeowner with a mortgage, are you thinking of renovating? Consolidating debts? You may have heard of a loan product called a top-up mortgage. Put simply, a top-up mortgage is a type of home loan that grants homeowners the opportunity to borrow more money against the equity they’ve built up in their property.

A top-up mortgage, or home loan top-up, is a common way to access credit by using your own home instead of making similar purchases on high-interest credit cards or unsecured loans (comparatively speaking.) It also avoids the rigmarole of applications with lenders and the usual checks. However, it’s not all upsides. There are some downsides to top-up mortgages, too.

Why homeowners opt for top-up mortgages

Homeowners ask lenders for top-up mortgages for a variety of reasons. Usually, a lender will grant a top-up of up to 80% of the home’s current value, provided you have a good standing with your lender and haven’t missed repayments.

A top-up mortgage can be used to pay for another property as an investment, consolidating many debts into one payment, buying a new asset, purchasing a luxury item or holiday, or to fund a renovation or extension to one’s current property. On paper, a top-up mortgage interest rate, with fees included, will be far less compared with a personal loan. However, like most mortgages, the loan term will be far greater than that of a personal loan – where as a personal loan may be paid off within a year to five years, a home loan term can be five to six times that long.

Top-up mortgages in practical terms

Let’s say you want to borrow the full amount allowable as a top-up. Your house cost $750,000 when you bought it five years ago, and you took out a $650,000 loan and paid LMI on top (as it wasn’t 20% deposit.)

Now you’ve paid off $150,000 (current loan balance of $550,000) and your house is now worth $900,000. That’s about a 60% loan-to-value ratio. The bank or lender may grant a top-up to about $720,000, giving you $170,000 to spend on an investment property, renovation, or car (for example.) Of course, your repayments would go up as a result, and the time you take to pay off your mortgage will be significantly longer, which could result in higher interest overall.

Fees and other costs to consider

Before you apply for a top-up mortgage, there are fees and application criteria to consider. Since this is akin to a whole new loan, your lender will want an up-to-date valuation on your home to assess your level of equity. You may need to pay legal fees, a fee for breaking a fixed-rate mortgage, and/or extra lender’s mortgage insurance (if applicable.)

If you’re unsure about a top-up mortgage, it’s best to seek advice from a financial professional first.

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This guide provides general information and does not consider your individual needs, finances or objectives. We do not make any recommendation or suggestion about which product is best for you based on your specific situation and we do not compare all companies in the market, or all products offered by all companies. It’s always important to consider whether professional financial, legal or taxation advice is appropriate for you before choosing or purchasing a financial product.

The content on our website is produced by experts in the field of finance and reviewed as part of our editorial guidelines. We endeavour to keep all information across our site updated with accurate information.

Approval for home loans is always subject to our lender’s terms, conditions and qualification criteria. Lenders will undertake a credit check in line with responsible lending obligations to help determine whether you’re in a position to take on the loan you’re applying for.

The interest rate, comparison rate, fees and monthly repayments will depend on factors specific to your profile, such as your financial situation, as well as others, such as the loan’s size and your chosen repayment term. Costs such as broker fees, redraw fees or early repayment fees, and cost savings such as fee waivers, aren’t included in the comparison rate but may influence the cost of the loan. Different terms, fees or other loan amounts may result in a different comparison rate.

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