Should you consider a top-up mortgage?

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, updated on August 4th, 2023       

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Top up mortgage explained

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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