Personal Loan vs a Home Loan Top-Up: Which is Right for You?

If you own your home and need to fund a renovation, event, consolidate debt, or borrow for other large expenses, should you look at a personal loan? Or could a home loan top-up help instead?

What is a home loan top-up?

A home loan top-up is when you use the equity in your home to access a loan. This is done by topping-up your mortgage by the amount you need to borrow. For example, by adding an additional $50,000 on your mortgage in exchange for a $50,000 loan.

What is home equity?

Home equity is the difference between the value of your home, and how much you still have left to pay on your mortgage. For example, if you have a home with a market value of $600,000 and a mortgage with $400,000 left to pay, you have $200,000 in home equity.

Home equity is built as you pay off your mortgage and/or your house rises in value. If the market value of the house mentioned in the example above increases to $650,000, for example, the equity in the home would grow to $250,000.

How does a home loan top-up work?

Typically, although not always – and based on your income and the cost of the property – lenders allow you to borrow up to 80% of a home’s market value, and require you to have a 20% deposit, or 20% in equity. As your equity builds, and you pay down your debt, you may be able to use the added equity as security to make further loans. This can be done through a home loan top-up, also known as a home equity loan. 

It’s important to note that despite being commonly referred to as a top-up, these loans are actually not typically added to your existing mortgage. While banks all have different practices, and the exact structuring of such loans depends on a variety of factors, home loan top-ups are usually done through a supplementary loan, or by consolidating your existing mortgage:

Supplementary loan, or second mortgage

This is a home loan that’s independent of your existing one. It will come with its own interest rate, terms, payment schedule and timeline. Effectively you now have two home loans to manage, the original loan plus the top-up loan.

Consolidating through a remortgage

This involves breaking your existing home loan and replacing it with the new agreement. For example, your lender could agree to replace your $400,000 mortgage with a new one for $450,000 (and then provide you with the $50,000 loan). Or, you could change lenders altogether, and ask for the loan as part of the remortgaging process.

Keep in mind that as you are breaking your existing loan, and replacing it, you may incur a break fee. Even if you are using your existing lender.

 

personal loan or home equity loan

Why get a home equity loan? The pros and cons

A home equity loan could be a better option than a personal loan or credit card. But it’s important to consider the pros and cons:

Pros

  • Compared to other forms of finance, such as personal loans and credit cards, interest rates are substantially lower on home loans
  • Home loans are longer than personal loans. This can help spread out the costs of the loan and make it more manageable
  • Personal loans typically allow you to borrow up to around $50,000 (some providers lend above this). With a home loan top-up you can borrow larger amounts, at the discretion of your lender
  • If consolidated with your existing mortgage, it leaves you with just the single mortgage to manage, simplifying your debts

Cons

  • A home equity loan will be secured against your home. So, if you can’t meet the repayments you risk losing your house
  • If you can’t increase your regular repayments enough, you risk taking the loan out for longer than your existing mortgage. If consolidated, you risk extending the lifespan of your entire mortgage
  • Even if the loan does not extend your mortgage, the long lifespan of mortgages can impact the savings made by the lower interest rate. For example, a $10,000 loan over three years at 13% interest (typical of a personal loan), would cost $2130 in interest. However, the same sum over 15 years at a rate of 4.32% would accrue $3605 in interest

Other factors to consider

  • Depending on what the home loan is for, you need to be okay with the fact the debt may long outlive the purchase
  • A home loan top-up provides a lump sum payment that will begin accruing interest from the moment you receive it. Depending on what the loan is for, you may receive it long before you actually need to use it. Such as for a large renovation that has ongoing, as opposed to upfront, costs. Although in this case you can organise the loan to be drawn down gradually, as needed, usually at a variable rate, before fixing the entire final amount borrowed at a lower fixed rate
  • You can’t access extra funding if needed. To access more money you will need to make a separate application
  • The loans can come with a host of fees and costs that can significantly add to the cost. For example, if you have to remortgage, you could be hit with a hefty break free for ending the existing mortgage early
  • Home loan top-ups are treated as a new home loan application. So require a more detailed and complex application process, which can often take longer to process than personal loans. If you are in need of finance in a hurry, it may not be your best option.

Compare home loans with Canstar

If you’re on the hunt for the best home loan deal, one of the best places to start is Canstar’s home loan database, ratings and awards. Not only can you compare 245 different mortgage products from 11 lenders, you can discover which loans and lenders earn Canstar’s top awards for value and service, as judged by our expert research panel.

The table below is sorted by Star Rating (highest to lowest), followed by company name (alphabetical). Products shown are principal and interest home loans available for a loan amount of $500K in Auckland. Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loan selector to view a wider range of home loan products. Canstar may earn a fee for referrals.

Compare Home Loans


How else can equity help?

There are some other ways you can use your the equity in your home to help finance other expenses.

Line of Credit loan

A line of credit home loan allows you to continuously borrow up to an agreed limit. This means any equity above this agreed limit can be continuously accessed at any time.

For example, if you have an agreed limit of borrowing up to 80% of your property’s value, and your property is worth $600,000, you can have a $480,000 mortgage at any time. When your mortgage drops below this, you can borrow back that money. So if you pay off $20,000, you can then borrow that $20,000 back again. This can be done continuously, as long as your mortgage never exceeds the agreed borrowing limit and you meet your regular repayments.

Redraw facility

A redraw facility is a feature that allows account-holders to withdraw any extra loan repayments made. So any previous mortgage repayments (above the required minimum) can be redrawn and used elsewhere.

→Related article: Offset Mortgage or a Revolving Credit Account: Which is Better?

Why take out a personal loan instead?

On paper, a personal loan may not seem like a good option, due to the higher interest rates. But, depending on your circumstances, there could be some situations in which a personal loan could be better suited for you.

  • If you only need a small loan – home loan top-ups tend to have minimums of thousands of dollars
  • You have excellent credit – while interest rates on personal loans can’t compete with those on a home loan, if you have excellent credit, you can get personal loans for as little as 6.99%
  • It won’t put your home at risk – an unsecured personal loan won’t use your house as collateral
  • You don’t have much equity – a home equity loan relies on either your property having substantially increased in value since you bought it, or you having already paid off a large part of your mortgage. If neither applies to you, it won’t be a viable option
  • You want a short, sharp, loan – personal loans can often be for as little as six months. If you can afford to repay the loan in such a short period, it may be a good idea, as you’ll avoid lingering debt and ongoing interest charges

→Related article: Things to Consider Before Getting a Personal Loan


Compare Personal Loans with Canstar

If you are considering taking out a personal loan, be sure to shop around and compare different lenders’ rates and fees. And this is something Canstar’s personal loan comparison tables can help you with.

The table below displays some of our referral partners’ unsecured personal loan products for a three-year loan of $10,000 in Auckland (some may have links to lenders’ websites). The products are sorted by Star Rating (highest to lowest) followed by company name (alphabetical). Use Canstar’s personal loan comparison selector to view a wider range of products on Canstar’s database. Canstar may earn a fee for referrals.


Changes to the CCCFA and what it means for accessing home equity loans

As of December 2021, major changes to the Credit Contracts and Consumer Finance Act 2003 have come into effect. This has involved a tightening of lending criteria, and any new lending needs to adhere to these stringent new rules.

As a result, gaining a home loan top-up is now a more complicated procedure than before, requiring greater scrutiny of your income and expenses. If you are in need of a loan urgently, a home loan top-up may no longer be a viable option.

If you are serious about getting a home equity loan, be sure to speak with your lender. Not only will your personal circumstances impact your ability to access a loan, but different banks have different processes and rules for what they can and can’t offer. While this article provides an overview, it in no way covers the full details, costs, or potential options available to you.

Compare Personal Loans


author andrew broadley

About the author of this page

This report was written by Canstar Content Producer, Andrew Broadley. Andrew is an
experienced writer with a wide range of industry experience. Starting out, he cut his teeth
working as a writer for print and online magazines, and he has worked in both journalism
and editorial roles. His content has covered lifestyle and culture, marketing and, more
recently, finance for Canstar.


Enjoy reading this article?

You can like us on Facebook and get social, or sign up to receive more
news like this straight to your inbox.

By subscribing you agree to the Canstar Privacy Policy

 

Share this article