Can I Get a Top-Up on My Mortgage?

Date Published: 7 October 2021

There are many valid reasons why you might be looking to pull some equity out of your property to use elsewhere. This is commonly called a ‘top-up’ on your mortgage. 

You get cash to spend (yay!) but in return your mortgage gets bigger. Interest charged on that cash means that unless you pay it back quickly you will end up paying back a lot more money than the amount you took out. For this reason, before you ask whether you can get a top-up, it is important to ask yourself if it is necessary and worth the long term additional expense. 

This article is current as of 2 February 2022.

Is a top-up the right thing for me?

A top-up is most often applied for in order to fund maintenance or improvements on the property itself. This can be a good idea if the work done on the property will maintain or increase the property’s value. Or, for that matter, if it will improve your quality of life while you live there. Often these things go hand in hand, for example installing a heat pump in the lounge or renovating an old house will improve both the property value and your quality of life.

The thing to keep in mind is whether you are making changes that buyers are likely to value when you go to sell. Thinking of landscaping your garden into a mini golf course complete with one of those scary clown mouth obstacles and a mini eiffel tower? It’ll cost a lot and likely to turn off many buyers down the track. In fact, anything involving clowns is going to drastically decrease your market appeal. 

There is an instance when a top-up can actually save you money. If you’ve got any debt that you’re paying higher interest rates on than your mortgage interest rate, you could save money consolidating those debts into your mortgage. However there can be break fees in paying those high interest debts off quicker than planned. Some calculations need to be done to identify whether it is financially beneficial to take this approach. Your mortgage broker can help you work out whether it’s a good move for you.

What do the banks take into account when deciding whether to approve an application for a top-up?

Just as when they assess a new mortgage application, the bank will look at:

• Income, including  whether it is secure,
• Spending habits
• Ability to pay interest at a high rate (~7% at time of writing)
• Other debts, and
• Credit rating. 

The CCCFA has introduced rules that mean the banks are now very risk averse when it comes to lending. The bank can only approve a top-up if they are satisfied that you can service the increased loan payments. They now require three months of bank statements that prove your current spending habits will allow for the increased mortgage payments. They will also calculate the affordability of your mortgage top-up using an interest rate of ~7% for the entirety of the mortgage. For this reason some people that once would have their top-up application accepted are getting declined.

The bank can only approve a top-up if they are fully satisfied that you can service the increased loan payments. 

In addition, there needs to be enough equity in the property. A bank will almost never approve a top-up that will put the property over the 80% Loan to Value Ratio (LVR) threshold.

To ensure they are lending responsibly, the bank will ask for up-to-date proof of income and your financial situation. This can be frustrating, as you may have given the exact same information at the time of the original mortgage. But the bank needs to be assured that their decision is informed by your current circumstances.

Does the bank care what I am using the money for?

Yes, to a point. The term of the top-up can be shorter than the rest of the mortgage. The reason for the loan will help determine the period of the loan. 

If the money isn’t going towards an asset, the bank sets shorter periods for the top-up to be paid off. For instance, you can get a top-up for a car loan but that debt will be structured to be paid off over five years. This is because it’s a depreciating asset.

If you’re after a holiday or new furniture they won’t necessarily decline your application. But again, the loan will be payable over a shorter term. Think very carefully before getting a top-up for anything that doesn’t grow the value of your assets. Unless you pay it off straight away you will end up paying a significant amount in interest. Factor that interest into the cost of what you’re buying before you decide whether it is worth it or not.

If you’re borrowing the money to start a new business that would indicate that your income is going to change. In other words, it is likely you’re going to quit your job. That makes your current proven income irrelevant and your ability to service the loan will be in question. However if it’s for a side hustle rather than your main income stream then the bank is likely to look on it favourably. 

The key thing is to be honest. The bank is trying to do right by you financially. You won’t do yourself any favours by giving false information.

How can I improve my chances of getting my top-up application approved?

You know what we’re going to say! Use a mortgage broker. They will make sure your application is in order and that you’ve provided any supporting information the bank will require. They’ll be able to give you an indication of the likelihood of your application being approved, and advise of any action you may need to take to make your situation more attractive to the bank.

In the meantime, If you haven’t had your property valued recently, get this done. It is likely that your property will have gone up in value, making the LVR ratio much more attractive to the banks. If you haven’t previously paid your mortgage down, this will be key to getting your top-up approved.

There you have it. Top-ups aren’t to be entered into lightly but can be a great option in certain circumstances. Apply long term thinking to your decision making and you won’t go wrong.

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