What you should know about borrowing money on your mortgage

Topping up or borrowing extra money on your mortgage can be a smarter way to access credit than using high-interest credit cards or personal loans. While you are adding to your mortgage and increasing your repayments, you may be paying a lower interest rate. 

So how do you get a top-up on your pre-existing mortgage? In simple terms, a top-up mortgage is a type of home loan that provides homeowners with the opportunity to borrow money against the equity they’ve built up in their property.

How to borrow more money on your mortgage

When looking to borrow more money on your mortgage, the amount you can borrow will depend on the equity you have in your home. Home equity is the difference between the market value of your home and the amount you still owe on your home loan. For example, if the market value is significantly greater than the amount you owe, you may be able to borrow extra money against your mortgage. 

Your lender will also check your current loan-to-value ratio (LVR). The LVR is usually 80% of a property's value. Your LVR will help the lender determine the maximum loan amount that you can borrow. If you pass its lending standards, your top-up may be approved. 

You may also have to pay additional fees when applying for a top-up. While these fees are generally minimal, it’s essential to put an amount aside if there are any associated costs with your application. 

How can you use the extra funds?

You can use the funds you get from a top-up mortgage for a variety of purposes. Some of the common reasons people borrow more money on a mortgage are: 

• Home improvements and renovations
• Buying a car
• Consolidating debt, i.e. paying off outstanding debts
• Funding a vacation 

What should you consider before deciding to top-up your home loan?

Topping up a home loan means you’ll be taking on more debt and may also face increases in your repayment amount. Therefore, it’s essential to understand the impact the top-up will have on your finances, why you need it, and to plan well in advance. 

For example, if you borrow extra money on your mortgage for a holiday, the loan will last a lot longer than the reason for adding on additional debt, costing you more in interest charges. In such a case, it may be better to hold off and save up the money required for a holiday. However, if you plan to use the funds to increase the value of your home through renovations, then applying for more funds may make more sense. 

The most important factor to consider is that you’re able to repay the additional debt you undertake without any financial duress. This is also an important point that your lender will look at when assessing whether to allow the top-up mortgage.

What should you do next?

If you’re looking to borrow more money on your mortgage, you can reach out and discuss this with your lender. They can help you understand how much you may be eligible for and the interest rates, fees and other charges.

You could also consider discussing your situation with a financial advisor or mortgage broker. With the right insights from an expert, you can then assess your options and choose the right path for you. 

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