Understanding the Purpose of a Top-Up Mortgage

  • Posted 08 Oct

Understanding the Purpose of a Top-Up Mortgage

For those who are not too familiar with the term, ‘Top-Up Mortgage’ is a type of home loan that lets homeowners have access to the equity accrued in their house.

Still not clear? To put it simply, top-up mortgages let homeowners use (access) the equity in their own homes, without having to sell the property, to gain access to that money (equity).

Once a homeowner can access that money, they can use it to fund a lot of things, all without having to sell the house in the process.

Understanding Equity

Since equity is the sum of difference between the market value of your property and the mortgage you still owe on it, that money can be used to pay for various things related to your property (such as maintenance, renovations etc.), to pay off other debts, or use as a deposit on an investment property.

Through a mortgage top-up, the amount of money you can borrow by guaranteeing against your home, depends completely upon the value of your home and on how soon you’ll be able to pay off the loan, i.e. your financial stability.

If you’re looking to top up your mortgage, you should be prepared to pay the following fees:

  • A valuation fee
  • Legal fees
  • Mortgage protection insurance
  • Other fees as applicable

Since the interest increases upon topping up the mortgage, it’s probably best to seek professional advice before you decide to take the final step so that you are aware of your all your options and risks.

How do they work?

The purpose of a top-up mortgage is quite simple. Once you meet the criteria set out by your lending institution, you borrow money against the equity in your home.

Top-up mortgages can be very useful. Since interest rates on home loans tend to be lower than on car loans or personal loans, borrowing money through a top-up mortgage from any bank or lender in Australia, will probably cost you less in the long run.

As borrowing through top-up mortgages offers flexibility in refinancing, they can be used on a wide variety of expenditures such as:

  • Home improvements and renovations
  • Purchasing other investment properties
  • Paying off outstanding debts
  • Paying the 5% deposit on a home loan for a bigger, more attractive house
  • Buying a new car without having to take out a car loan
  • Funding your children’s higher education in Australia or abroad

However, as lucrative as it sounds, it’s probably a good idea to consult a financial advisor before you decide to top-up your mortgage, as the process is not entirely free of risks.

If you use the increase to pay off different things, the mortgage repayments will increase and you will have to keep repaying the loan, along with additional interest, for a longer period of time.

Like any financial instrument, top-up mortgages have many uses, advantages and risks involved.

Want to know more about top-up mortgages? Contact our team of home loan experts today and find out if it’s right for you.

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