The ins and outs of topping up your home loan
Did you know that you can increase your existing home loan? This is referred to as a loan top-up (also known as a loan increase), and is commonly used by homeowners to free up funds for renovations, a new car, gifting money to adult children, and investing in property. It works by letting homeowners "release" some of the equity they've built up in their property.
"Equity" refers to the portion of your property that you've paid off and truly own. If you purchased your property with a 20% deposit and borrowed 80% of the property price, then you would have 20% equity of your property from the outset.
This amount of equity grows both as you pay off your home loan and the value of your property increases. But if you wanted to turn some of that equity into cash, you can do so through a loan top-up.
Tony Dao, lending specialist from State Custodians, shares his top tips to help you determine whether a home loan top-up is worth considering.
Consider your borrowing power
Before applying for a home loan top-up, Tony says it's important to do your homework to understand your current and possible future financial position.
He also suggests keeping in mind that your situation will likely have changed since you first took out your loan, which could affect the options available to you.
"Just because you qualified for the home loan in the first instance, doesn't mean you're going to be eligible today. Lending requirements, the value of your property and your financial position may have changed, which will ultimately have an impact on your eligibility."
Getting a home loan top up can also help to consolidate multiple high-interest debts into your home loan, which typically has a much lower interest rate compared to credit cards and other loan types.
Before going down the debt consolidation route, Tony advises to be mindful of the potential impact of consolidating your loans against your home.
"By getting a top up, you could end up spreading the consolidated debts out across the entire term of the home loan, which means you would pay a lot more interest than you would on a high interest, but shorter term loan," he says.
One way this can be avoided, says Tony, is by splitting the loan, pooling all the short-term debts together, and making a commitment to pay that portion off over a shorter timeframe.
Use the funds for the agreed purpose
Accessing a home loan top-up for renovations or home upgrades is a popular reason why people seek to release equity from their home. This could be to add value if you're planning to sell down the track or to simply get more out of your current living space.
"With many people stuck at home due to multiple lockdowns and no overseas travel, it's been a good time for homeowners to spruce up their garden or make some long overdue upgrades to their home," says Tony.
Note: Most lenders will require that you disclose what you're going to use the funds for, and not all uses will be approved. Being honest with your lender about what you're planning to do with the funds is key.
For State Custodians customers seeking a home loan top up, Tony suggests calling the lending specialists on 13 72 62 (option 2) to discuss your options.
Whether you want to better manage your finances, make upgrades to your home or access equity for any other reason, understanding your options and being aware of your liabilities will help empower you to make a decision that best suits your situation.
Disclaimer: Examples are for illustration purposes only. This information does not constitute financial advice, and the general nature of the content might not be applicable to you or your situation. Please seek independent financial advice before acting on any information. The opinions expressed in this article are the opinions of the author(s) and not necessarily those of State Custodians. The above is general commentary only and is not advice tailored to any individual's financial situation. Again, we recommend seeking advice from a finance professional before implementing changes relating to your finances.