Home Renovation

Borrowers use increased home equity to get some extra cash

Apparently, home-owners have topped up their mortgages by nearly $93 billion in the last year, given the rising property values and increased equity. Most lenders have also replaced traditional products such as lines of credit with top-up loans or supplementary loans using property equity as security. 

Just a quick recap, equity is the difference between the market value of a property and the amount you still owe on your home loan. And home loan top-up is a way to borrow extra money against your current home to pay for renovating, a car, extra cash or whatever you choose. When you increase the amount you owe on your existing home loan, your repayments will increase. 

Do your homework

So you’re pumped to get the sweet cash, which is totally understandable with the soaring property prices and your boosted owner equity. But when it comes to debt, you need to think carefully and be prepared. You don’t want to see yourself trapped with nowhere else to move…eek. 

Many people are not aware of the potential consequences of loading up on debt and not making those extra repayments quickly. Here are a few things to consider:

  • Your current income and ability to afford increased repayments
  • Your credit history and recent borrowings
  • The current market value of your property
  • Your age and the amount of time you want to borrow for
  • Other fees and charges: tax implications if you’re borrowing for  investment purposes, a valuation fee, a breakage fee if you are on a fixed-rate mortgage, administrative fees for changing the terms of your original mortgage, home loan protection insurance, legal fees,…

Pay off your loan as fast as you can

Ok, the average interest rate on a top-up loan is usually cheaper than other loans (around 2.6%, compared to 5.8% on a personal loan and more than 17% for credit cards) But if not paid promptly, you may pay more interest over the life of the loan and it would be bunged under the ‘bad debt’ umbrella. Basically, you should pay off your debts before the thing you buy becomes worthless or gets replaced. 

“If you pay the money back over a long period of time, then you could end up paying more. The final cost of a loan is heavily influenced by the loan term,” – Sally Tindall, research director of RateCity. 

Plan your home reno

Before you have someone come to knock down your walls or paint your bedroom on a whim, you need to have a proper architectural plan, listing all specified building materials, appliances, fittings, colour schemes and price. 

Many renovators are facing inflated building material costs, longer completion dates, pushed-up prices with changes in the plan because they often don’t have a clear idea of what they want or how much they want to spend. 

“They are running the risk of potentially over-capitalising on their properties” – Phil Dwyer, a builder and national president of the Builders Collective of Australia.  

That is not OK. Make sure it’s not happening to you. Plan ahead and add a wiggle room (and maybe some more, just to be safe). 

Begin the bargaining 

An increase in equity also means lower loan to value ratio, which is rather advantageous. What does this mean for borrowers? Go snap up a better rate, if you can. Borrowers with lower LVRs can enter into negotiations for better rates with their existing lenders and may even shop around for a new lender with better offerings. 

“Lenders are keen to keep their good customers,” Christopher Foster-Ramsay, principal of Foster Ramsay Finance “Each application is different, but a borrower with a good repayment record and evidence that it can be maintained might be able to knock 20 or 30 basis points off their rate.”