What is a home loan top-up?

A home loan top-up lets you borrow additional money against your home, on top of your existing mortgage loan. This is possible because the value of your home may have increased since you first took out a loan, and you may have also repaid part of your original loan. This means you may have equity available in your property, which could be used to secure credit. 

Not every mortgage can be topped up. If you have a guaranteed or fixed interest loan, you cannot increase the loan amount without breaking the agreement, which may trigger a fee.

If your home loan agreement allows for a top-up, how much extra you can borrow depends on how much equity you have in your home and your present financial situation. Your usable equity is typically 80 percent of your property’s current value, minus your remaining mortgage principal.

It’s a good idea to speak with your lender to find out whether you’re eligible for the top-up and if there are any fees associated with the additional loan.

Firstly, check with your lender if you’re eligible for the top-up, and if not, what are the other available options.

If you’re eligible, the lender will check your present financial situation to determine if you’ll be able to meet the additional repayments.

The lender will also organise a valuation of your home to ascertain its current market value, which determines the loan-to-value ratio (LVR). If topping up your home loan would push your LVR higher than 80 per cent, you may have to pay Lender’s Mortgage Insurance (LMI) to the lender.

You can then proceed with the application, and the lender may charge an establishment fee.

On approval, the money either gets deposited into your bank account or you may have to access the additional loan amount via a redraw facility. You could check the exact details with your lender or mortgage broker, as different lenders may handle these matters differently.

A home loan top-up is generally considered more affordable when compared to other options, such as a personal loan or a credit card loan, because of the lower rate of interest. However, it means you’re taking additional debt that may increase your mortgage repayments. Before taking out the loan, ensure you can afford the additional instalments without facing any financial distress. You could use a repayment calculator to work out your repayment size for the loan.

You should also consider the purpose for which you’re taking out the loan. If you’re taking a top-up loan to fund a holiday or pay your outstanding credit card bill, remember that the life of these expenses is shorter than the balance loan duration. Even though the interest rate on a home loan top-up may be lower than some other financing options available to you, you’ll be paying interest over a longer duration. So, be sure that the use of the additional funds is in line with your financial goals.

If you’re borrowing more funds against your home’s equity to invest in another property, there may be some tax implications. It is recommended you discuss these with your tax consultant or accountant.

Generally, the interest on an investor home loan can be claimed as a deduction when completing your income tax return. If you use the top-up loan to pay for an investment property, your interest payments may be tax deductible. However, if you use the borrowing for personal use, such as renovating your residence, you can’t claim a tax deduction. It could be helpful to speak with an expert to understand any tax benefits that might be available with a top up loan.