What does it mean to ‘top up’ a home loan?

Topping up a home loan means to increase its size, thereby allowing you to access funds you otherwise couldn't.

A 'top up' is a simple way to describe cashing out equity.

If your home is worth more than your mortgage, the extra is called equity – in other words, equity is the portion of your home's value that you own outright.

But how can you go about topping up your home loan and what factors should you consider before doing so? Let's dive in.

What is a home loan 'top up'?

Do you have a mortgage and want to make a special purchase? Or perhaps you simply need some extra funds to cover a large expense, such as:

• A new car

• A fancy holiday

• A home renovation

• A significant bill

• School fees

• Debt consolidation

• A dream wedding

• Anything else you might like!

If the size of your home loan is less than the value of your property, you might be able to simply bolster your mortgage to cover costs like those listed above.

Here's an example of how a home loan top up might work:

Jane owns a three bedroom townhouse near Perth, for which she has a $300,000 home loan. Her home is currently valued at $600,000.

That leaves Jane with $300,000 of equity. If Jane wanted to spend some of that equity – perhaps on a bathroom renovation – she could approach her lender and ask for a home loan top up.

Her lender might agree to increase the size of her home loan to $350,000, leaving her with $250,000 of equity and $50,000 of cash.

It's also worth considering the fact that a lender probably won't let you access all your equity. It might ensure you still own at least 20% of your property's value – leaving you with an 80% loan-to-value ratio (LVR).

Home loan top up vs. refinancing

It's important to note the difference between topping up a home loan and refinancing.

• Refinancing
  Involves switching to a new loan or moving your loan to another lender, which can be a longer and more expensive process

• Top ups
  Are generally quicker and come with fewer fees, as you're simply increasing your existing loan amount

See also: Refinancing your home loan to access equity

What to consider before topping up your home loan

However, there are downsides to topping up a home loan, namely:

• Increasing the size of your home loan will increase your repayments

• Can mean you pay more interest over the life of your loan

• Could increase the time it takes to repay your mortgage

• Lenders typically charge a fee for home loan top ups

All that considered, Jane needs to decide whether increasing the size of her home loan is worth it.

Assuming she has an interest rate of 6.00% p.a. and 20 years left on her home loan, topping up her home loan would increase her repayments from around $2,150 a month to more than $2,500 a month.

It would also see her paying close to $252,000 of interest over the remaining life of her loan, assuming she doesn't make any extra repayments.

That figure would be around $216,000 if she doesn't top up her home loan and continues to make her regular repayments – a difference of more than $35,000.

Is it better to top up a mortgage or take out a new loan?

If you're planning to top up your home loan to cover an expense like a holiday or a renovation, you might be wondering if you'd be better off taking out a personal loan instead.

Of course, the right pathway forward will depend on your personal circumstances and financial habits. Still, here are the major factors worth considering:

• Interest rate (and comparison rate)

• Lifespan of loan

• Total interest outlay

• Size of (additional) repayments

• Associated fees

Most of those factors are intertwined. For instance, the interest rate and lifespan of a loan will determine the size of its repayments.

Let's take a broad, general look at the typical benefits and drawbacks of a home loan top up, compared to refinancing or taking out a personal loan:

	Home loan top up	Refinancing	Personal loan
What it is	Access extra funds by increasing your current home loan	Switch to a new loan or lender for better terms	Borrow a lump sum for a specific need like a car or debt consolidation
Interest rate	Typically the same as your current home loan	May provide a lower rate than your current loan	Generally higher than home loan interest rates
Fees	May incur top up fees (varies by lender)	May involve break fees and application costs	Application or monthly service fees may apply
Repayment term	Same as remaining home loan term	Can reset or shorten loan term	Shorter term (usually one to seven years)
Total interest cost	Lower rate but long term may increase overall interest paid	Might save in the long-term if switching to lower rate, but resetting loan term or increasing debt could increase costs	Generally higher rate of interest, but shorter term can reduce overall interest paid
Speed of access	Quick, since you're increasing an existing loan	Tends to take longer due to new application process	Normally faster than refinancing, as process is simpler

As the chart above mentions, the interest rate on a home loan will typically be lower than that on a personal loan. However, the longer lifespan of a home loan can mean a borrower pays more interest over time than they would have if they had simply taken out a personal loan.

One way to get around this is making regular additional repayments after topping up your home loan, but that's not always possible.

If you're tossing up your options, make sure to take the time to calculate not only the extra repayments you might face, but the total interest outlay you could end up repaying.

You can use Your Mortgage's home loan repayment calculator to crunch the numbers.

Do home loan top ups impact your credit score?

Typically, a lender will run a new credit check on you if you choose to top up your home loan.

That in itself can impact your credit score, as a hard credit check can show up on your credit report for a few years after it was performed.

However, the impact a home loan top up will likely have on an already-decent credit score is probably negligible.

Not to mention, if you're trying to preserve your credit score for a particular reason, chances are you'll be able to explain the reason behind the credit enquiry on your record.

Is topping up your home loan a good idea?

Whether or not topping up your home loan is the right move for you will depend on your individual circumstances. If you're unsure, it's best to reach out for independent financial advice.

However, perhaps the main question you might want to ask yourself when deciding if a home loan top up would suit you is: What do I need the money for?

When it comes to spending, there are two broad purchasing categories:

• Necessary and

• Unnecessary

Topping up a home loan in order to meet a necessary expense (perhaps you need a car for work or maybe you're planning to consolidate debt) is a different prospect to taking out more debt for an unnecessary expense (like a holiday or a cosmetic renovation).

Think long and hard about whether you need to access your home equity. You might find you answer your own question of whether or not to top up your home loan.

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