After you have had your home loan for some time, you may find that you require more funds for other things. That’s where a mortgage increase comes in.

If you have sufficient equity, most mortgage lenders will allow you to increase your home loan to fund other things. This is often called a "top-up" and allows you to borrow additional funds against the equity you have in your home. You can then use this equity to fund other things. Some reasons homeowners do this include:

• Buying another property to use as an investment
• Renovations for their current property
• Consolidating debts
• Large purchases such as a holiday or car

How does it work?

It is a viable option for anyone with an existing mortgage who has equity. Equity may have built up by contributing a large chunk of your savings initially when you purchased the property, or you may have paid your loan down, or the value of your property may have increased. The amount you will be able to borrow will depend on how much equity is available as well as your own financial situation.

A key part of the process is determining exactly how much equity you have. This is determined by getting the lender to do a valuation done on your property. The lender will then have an up-to-date value to work out how much you may be able to access.

Generally, you can only increase your loan up to 80% of the value of the property without incurring mortgage insurance, or up to 90% if you’re happy to pay mortgage insurance.

To get an idea of how much your property is worth, you may need to do some research. The Free Property Report on our website is a good starting point. This will give you property price data for your suburb as well as a number of recent sales. Find sold properties that have similarities to your own to give you an idea of your property’s value.

If your loan is already with homeloans.com.au, we may be able to get an RP Data report on your property, which will give an estimate of its value. Call our Lending Specialists on 1800 111 001 to discuss this option.

If you are interested in taking out additional funds against your home loan, speak with your lender about the options that are available. Depending on your lender, they may charge an establishment fee to cover the costs involved.

When you apply, your lender may do a similar assessment as if you were applying for a new home loan to ensure you will be able to handle the increase in repayments. If you are planning to increase your home loan, make an effort to reduce any other existing debt as much as possible.

Just like all types of home loans, there are both pros and cons for top-up mortgages.

Benefits

• It can often be cheaper than taking out a personal loan or car loan, as most home loan interest rates are lower.
• You will not pay interest on your loan increase until you actually draw the money to use.
• You will only have one repayment to juggle rather than multiple debts with different repayments.

Pitfalls

There are some dangers with increasing your mortgage.

The main one is that you are putting yourself in further debt. You should be looking to pay your home loan off, not increasing it.

Secondly, a mortgage is spread over a long time, so even though the interest rate is cheaper than a car loan, only paying the minimum means you will be paying more in interest and spreading the cost of the car out over the remaining term of your loan, which could be 20 to 30 years.

The important thing is to have a plan. Get your mortgage lender to calculate how much extra you would need to pay with each repayment to pay the increased amount off in a certain term. A car, for example, might be five years. You could also get the increase put in a separate sub account or split so that you keep focused on paying it off quickly. This way, after you have paid back the increase, you are back to concentrating on paying off your original loan amount.

Before you top up your mortgage, think about your financial situation now and down the track to ensure it is the best option for you. If the purchase can be put off, then saving the funds in advance and keeping it in an offset account may be an even better option.

The opinions expressed in this article are the opinions of the author(s) and not necessarily those of homeloans.com.au. The above is general commentary only and is not advice tailored to any individual's financial situation. We recommend seeking advice from a finance professional before implementing changes relating to your finances.