Australian borrowers have topped up their mortgages by almost $93 billion over the past year
Homeowners have taken advantage of rising property values and increased equity to top up their mortgages by almost $93 billion in the past year. They’re spending those funds on things like home renovations, cars, and real estate investments – or to tide over struggling businesses.
In June, mortgage top-ups rose to about $10 billion, about 17% above June 2020, with loans by owner-occupiers rising nearly 30%, according to a report by The Australian Financial Review. Top-ups have risen as Australia’s major property markets posted huge growth and interest rates are at record lows.
Most lenders have replaced traditional products like lines of credit with top-up loans, or supplementary loans, using property equity as security, according to AFR. Lines of credit have fallen out of favor due to the risk of borrowers redrawing payments rather than paying down the loan over time.
“It got out of hand for many borrowers because they would only pay down the interest and not the principal,” Anita Marshall, managing director of mortgage broker Advanced Financial Solutions, told AFR.
So, most lenders have replaced lines of credit with top-up mortgages, usually a new loan based on how much equity is available in the property and the borrower’s ability to repay.
Top-ups aren’t available for all home loans, AFR reported. Commonwealth Bank, for example, does not allow top-ups for fixed or guaranteed interest mortgages without breaking the original contract. Breaking that contract will mean an expensive “early adjustment repayment” and administrative fees to break the fixed rate, plus an establishment fee for the new loan and monthly loan service fees.
However, top-up loans can be a good deal for borrowers. The average interest rate on a top-up loan is about 2.6%, compared to 5.8% on a personal loan and more than 7% for credit cards, said Sally Tindall, research director for RateCity. Tindall cautioned, however, that those topping up a loan to pay for a holiday or a new car should try to pay it back as quickly as possible.
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“If you pay the money back over a long period of time, then you could end up paying more,” Tindall told AFR. “The final cost of the loan is heavily influenced by the loan term.”
For example, the total interest paid on a loan to buy a $50,000 car over a five-year term would be around $7,762 for a 5.8% personal loan, compared to about $3,400 on a 2.65% top-up, AFR reported. But if the top-up term is extended to 15 years, the total interest spikes to more than $10,600.
