The pros and cons 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 or a loan increase. It 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 is the portion of your property that you've paid off and own. For example, if you purchased your property with a 20% deposit and borrowed 80% of the property price, then you would own 20% of your property.
The amount of equity that you have tends to grow as you pay off your home loan and the value of your property increases. If you wanted to turn some of that equity into cash, you can do so through a loan top-up or increase.
Below are some common scenarios to help you determine whether a home loan increase is worth considering for your situation.
Your borrowing power
Before applying for a home loan top-up, it's important to do your homework to understand your current and possible future financial position.
It is important to keep in mind that your situation will likely have changed since you first took out your original home loan, which could affect the lending options available to you.
Just because you qualified for your home loan in the first instance, doesn't mean you're automatically going to be eligible today.
Lending requirements, the value of your property and your financial position may have changed significantly, which will ultimately have an impact on your home loan eligibility.
Consolidating your debts
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 personal loan types.
Before going down the debt consolidation path, borrowers should be mindful of the potential impact of consolidating loans against your home.
By getting a home loan top up to consolidate debts, you could end up spreading the consolidated debts out across the entire term of the home loan.
The typical term of a home loan is 30 years, which means you could end up paying a lot more interest than you would have without the debt consolidation.
This can be avoided is by splitting the loan amounts, pooling all the short-term debts together, and making a commitment to pay that portion off over a much shorter timeframe.
Purpose of funds
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 enjoyment out of your current living spaces.
Home loan lenders will often require that you disclose to them what you're going to use the funds for, and not all uses will be approved. Being honest with your Mortgage Broker and your chosen lender about what you're planning to do with the funds is key.
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 current situation and future goals.
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.