Latest / That Home Loan Hub / Unlocking Home Equity: Is a Top-Up Loan Right for You?
Transcript
- 0:10Speaker 1: Kia ora and welcome back to the Home Loan Hub.
- 0:12Speaker 1: Today we're going to dive into a hot topic that's become more and more common in 2025.
- 0:17Speaker 1: Top-up loans.
- 0:19Speaker 1: You might have heard a friend say they're getting a bit more out of their mortgage or borrowing against their equity for renovations or a holiday.
- 0:27Speaker 1: But what exactly is a top-up loan, and is it a smart move or is it a debt trap in disguise?
- 0:35Speaker 1: Let's break it down.
- 0:36Speaker 1: What's a top up loan?
- 0:38Speaker 1: A top up is when you borrow additional money on top of your existing home loan, using the equity in your property as security.
- 0:46Speaker 1: So, for example, say your house is worth $800,000 and your mortgage is $500,000.
- 0:53Speaker 1: That means you've got about $300,000 in equity.
- 0:57Speaker 1: We can only lend up to 80%, so you might be able to borrow a portion of that, depending on the bank's criteria.
- 1:04Speaker 1: People top up for all kinds of reasons.
- 1:06Speaker 1: I've seen renovations.
- 1:08Speaker 1: I've seen debt consolidations, starting a business, even helping their kids with a deposit.
- 1:13Speaker 1: It sounds simple and it can be, but just because it's available doesn't mean it's always a good idea.
- 1:20Speaker 1: So when does a top-up is a good idea?
- 1:25Speaker 1: A top-up can be a great tool when it adds value or improves your financial position long-term.
- 1:30Speaker 1: So, for example, renovating your kitchen or a bathroom to boost resale value, replacing high interest credit cards or personal loans with one or a lower home loan rate, finding necessary medical treatment or education if you have a solid repayment plan.
- 1:48Speaker 1: I've helped clients use top-ups to build sleepouts at bedrooms or consolidate debts from 20% down to 6%.
- 1:56Speaker 1: That's powerful, but only if it's paired with a financial discipline.
- 2:01Speaker 1: Now, when does it become a trap?
- 2:04Speaker 1: Now, here is where I put my advisor hat on and I say be careful.
- 2:10Speaker 1: A top-up loan can easily turn into a long-term debt trap.
- 2:14Speaker 1: If you're using it to fund lifestyle spending so holidays, cars, shopping.
- 2:19Speaker 1: If you're spending outside your means, if you're adding $20,000 to your loan for something that depreciates immediately, if you're stretching repayments over 25 or 30 years just to make it.
- 2:32Speaker 1: Let's look at the math.
- 2:34Speaker 1: If you top up $30,000 at 6.9% interest over 25 years, your payments might feel manageable say, around $215 a fortnight but in total you'll pay over $64,000 back to the bank.
- 2:49Speaker 1: That's double of what you borrowed.
- 2:52Speaker 1: We don't want you to do that.
- 2:54Speaker 1: So what do banks look out for?
- 2:56Speaker 1: A top-up isn't always guaranteed, and here's what the lenders look at how much equity have you got?
- 3:02Speaker 1: Most of the banks will want you to stay under 80% LVR.
- 3:06Speaker 1: We also look at your income and expenses.
- 3:09Speaker 1: Can you afford the higher repayments?
- 3:11Speaker 1: We'll look at your credit history.
- 3:13Speaker 1: Have you missed repayments or had arrears?
- 3:15Speaker 1: You might also need updated pay slips, bank statements and a quote or an invoice if it's for renovation.
- 3:21Speaker 1: And one thing to remember every time you apply for credit, it leaves a mark on your credit report.
- 3:27Speaker 1: So don't apply casually.
- 3:28Speaker 1: Be strategic.
- 3:29Speaker 1: And if you haven't listened to my podcast about the credit scores that we've just done, please go back and listen to that.
- 3:35Speaker 1: Very important information was shared in that one.
- 3:38Speaker 1: Now, if you're considering a top-up, here are my top tips.
- 3:42Speaker 1: Have a clear purpose.
- 3:44Speaker 1: What exactly is the money for and how will it help you Keep it on short term, even if it's 20k for a bathroom?
- 3:52Speaker 1: Don't pay it off over 30 years.
- 3:54Speaker 1: We usually schedule it at around 5 to 7 year loan structure.
- 3:57Speaker 1: Don't bundle it blindly.
- 4:00Speaker 1: Some lenders add the top up to your main loan, stretching it over the full term.
- 4:04Speaker 1: That makes it feel cheaper, but you pay it more in the long run.
- 4:08Speaker 1: And work with an advisor.
- 4:09Speaker 1: A good advisor, hey, like me, can help structure it in a way that makes financial sense, not just what's easiest.
- 4:17Speaker 1: And look, I had a client last year who wanted to consolidate 40K of high interest debt into their mortgage.
- 4:23Speaker 1: They were paying over $1,000 a month across four credit cards.
- 4:27Speaker 1: We've restructured it as a top-up, fixed for five years at 6.6% and their payments dropped to 780 a month, with a clear plan to pay it off under seven years.
- 4:38Speaker 1: The key we didn't stretch it across 30 years.
- 4:41Speaker 1: We kept it lean and goal-focused and affordable.
- 4:45Speaker 1: That's the difference between leveraging your equity wisely and falling into a debt spiral.
- 4:52Speaker 1: Look, top-up loans can be empowering, but they can come with a huge responsibility.
- 4:58Speaker 1: If you treat them like a credit card with a bigger limit, they'll cost you more than you think.
- 5:03Speaker 1: But if you use them strategically with a plan, you can unlock potential in your home and in your finances.
- 5:09Speaker 1: If you're thinking of topping up or just want a second opinion, reach out.
- 5:13Speaker 1: I'm here to help you structure it right, not just make it fit.
- 5:17Speaker 1: And look, don't forget, every fortnight, on a Thursday, I run a webinar.
- 5:22Speaker 1: You can drop me a comment if you want me to expand on a certain topic and I'll be more than happy to help you out.
- 5:29Speaker 1: Until next time, stay informed, stay empowered and keep making smart money moves, see ya.