Is additional borrowing on a mortgage possible?

To pay for a large expense, you can choose from several options, such as a credit card or a personal loan. However, compared to these options, increasing your home loan amount may be a more affordable way to access additional funds. A home loan top-up allows you to borrow extra money against the equity you’ve built in your house.

How much can I borrow on my existing mortgage?

The top-up amount you can access may depend on your home equity, which is the difference between the current market value of your home and the outstanding mortgage amount. For example, if your home is currently worth $500,000 and the mortgage balance is $300,000, your equity is $200,000.

Through a top-up loan, you can borrow money against this equity. However, approval of your loan application will depend on your financial stability as well as the current market value of the property. Your lender will engage a professional valuer to determine your home’s current value, and some of the costs you could incur include valuation charges and legal fees.

How can I borrow more on my mortgage?

You can usually apply for a top-up loan online via your lender’s website. The lender will order a formal valuation to determine the current value of your home. The lender can then determine your home equity by subtracting your oustanding loan amount from your home's value.

However, the lender will probably not lend the entire home equity value as a top-up loan, as your lender will likely want your property to maintain a set loan-to-value ratio (LVR); typically 80 per cent of your property's current value.

For example, if your property is valued at $500,000, and the outstanding mortgage balance is $300,000, your equity will be $200,000. But your usable or accessible equity will only be $100,000, as the lender will only allow you to borrow up to 80 per cent of the property's value in total ($400,000).

You may be able to borrow more than 80 per cent by purchasing Lenders Mortgage Insurance (LMI), which helps protect the lender (not the borrower) from any possible losses if you defalut on your repayments. You may want to check the cost of LMI before opting for it.

How much can I borrow with an existing mortgage?

When you increase the mortgage amount, your repayments will also increase, so you may want to ensure you’re able to afford these higher repayments. You can use an online repayment calculator to estimate the additional amount you will need to pay when you take a top-up home loan. Such calculators are very simple to use and require basic inputs such as the additional loan amount, outstanding balance on your existing mortgage, and the current rate of interest.

When you apply for a top-up loan, your lender will check your financial situation to ensure you’re able to afford the higher repayment amount. You’ll have to confirm your details and verify your earnings, savings, assets, and liabilities. The lender will also run a check to determine your creditworthiness.

How can I use the home loan top-up amount?

A top-up loan offers flexibility, and the amount can be used for various purposes, including:

• A deposit for buying another property
• Undertaking home improvements and renovations
• Debt consolidation
• Children’s education costs

Is borrowing on top of your mortgage the right option?

If you have built up sufficient equity in your home and you can afford to make higher repayments, a top-up loan may be beneficial. However, before making your decision and proceeding with the home loan top-up process, consider some of the advantages and disadvantages:

Advantages

• The application procedure may be simpler compared to a new loan application
• Generally, the rate of interest is lower on home loans than other loans such as personal, credit card, and car loans
• Easier to manage when compared to managing multiple loan accounts

Disadvantages

• The interest paid over the loan duration can be high
• If you’re borrowing for investment purposes, there may be some tax implications, which should be discussed with your accountant
• Some lenders may charge an establishment fee that increases your borrowing cost
• Since you’re taking on additional debt, your home loan repayments will increase

It may be worth considering consulting a home loan specialist such as a mortgage broker before deciding to borrow more on your mortgage as you may take certain risks. You should remember that the regular repayment amount will increase, and the interest is calculated daily on a higher principal amount. Also, there is a risk of losing your home if you are unable to make the repayments on time.

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