Doing some home improvements or getting a new set of wheels doesn’t have to trigger a complete mortgage makeover.

If, like Oliver Twist, you would like some more, consider asking for a home loan top-up. It won’t have the dramatic turns of the Dickens classic. A top-up can either be an increase to your home-loan limit, or a separate account set up behind your home loan.

Chloe Brandt, 24, and her fiance, Zach Gadd, 27, took the top-up route this year. The couple bought their Sydney northern beaches house in late 2012, knowing they would eventually need some extra dollars to finish renovations.

“It was a bit of a dump,” says Brandt. “We did as much as we could without having to borrow anything.”

But by the end of 2013 they needed a fresh injection of funds to hire professionals to build decks and change the roof. “Our goal with the top-up was to get it to a point where we can then rent out another room and get an income from it.”

The house had risen in value by $120,000, so they had no trouble getting a $65,000 top-up. About $15,000 went into consolidating debt and the remainder into renovations.

Minor renovations are the most common reason people apply for a top-up, according to Dennis Mrljak, personal mortgage adviser at Smartline Personal Mortgage Advisers.

Debt consolidation, school fees or a new car might also prompt people to go cap-in-hand to their lenders. Paying $300 a month via a mortgage is a lot more cashflow-friendly than the $800 a month you might pay for a five-year car loan.

Others, such as property investor Emilia Rossi, have a longer-term plan. “The main reason I topped up all of my three loans was to be able to use the equity I had in each property to then put towards the deposit for the next investment,” she says.

It is a strategy she will use again next month when she tops up her current loan to buy a fourth investment property.

So if a home loan top-up is sounding like a handy tool, what do you need to consider?

How much do you need?

Most lenders put limits on top-ups. “Banks do get a bit nervous above $50,000,” says Mrljak. “The majority of them have $100,000 as a threshold and then you’ve got some lenders who almost have it uncapped, I guess, based on your equity and the affordability they will let you take it out for as much as you really need.”

Your lender will run the ruler over your current income and liabilities when you apply for a top-up and possibly require an updated property valuation. “It’s almost like applying for a loan from scratch with a lot of lenders,” says Mrljak.

How much equity do you have?

“A lot of people are prevented from either refinancing or topping up because they might be staring down the barrel of $7000, $8000 or $10,000 of [lender’s] mortgage insurance,” says Mrljak. He suggests waiting 12 to 18 months before applying for a top-up, particularly if you bought a property with a deposit of 20 per cent or less.

Why do you want the top-up?

Mrljak suggests thinking twice before consolidating debts or buying a car with your mortgage.

“If you are going to enhance the value of the property or you’re going to put it into another property or shares then it makes perfect sense. It’s a cheap way of getting your hands on that sort of money.

”But if you’re doing it to fund a big family holiday, it may not be the best idea to turn it into a 20-year loan and pay twice as much interest as you normally would.”

Unless you make extra repayments, the total interest can make topping up significantly more expensive in the long run. For example, a $30,000 personal loan over five years at 12 per cent will add up to about $10,000 in interest. A $30,000 top-up at 5 per cent over 20 years will result in interest charges of $17,500.

Beware of making a habit of topping up if you want to access equity for wealth-building strategies, Mrljak warns. “It can be quite easy to top-up your mortgage each time you feel you need extra money and this could eat away at your equity.”

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Posted by Christine Long – The Age Money on 16th April, 2014