Many people take out top up mortgage loans on their home. Common reasons are to pay for house renovations, repairs and maintenance, installing insulation and solar panels, buying a car or paying off credit card debt.
Understanding top up mortgages
If you paid $400,000 for your home ten years ago and borrowed $320,000, your equity when you purchased the home was the $80,000 deposit you paid. If your home has now risen to $800,000 in value and you have paid $120,000 off your mortgage, your equity in your home is now $600,000. Most lenders will allow you to borrow against your equity, taking into account what you still owe on your mortgage and how much income you earn.
Your increase in equity in your home makes it easy to get another loan. However, the increase in equity is often used for unwise purchases, like a car, a holiday, renovations that don’t add value to your home, or paying off a credit card but not addressing your credit card spending. It is easy money, but the amount of extra interest you pay is significant.
What is a top up loan?
- It is secured against the equity in your home.
- It is an additional loan to your primary mortgage, which means additional loan payments to meet each week.
Wise stewardship for renovations
Many people think that when they do significant renovations to their home, its value will increase in recognition of the money they have spent on it. However, extensive kitchen and bathrooms will probably add little value to your home. That’s because the work done is mostly catching up on deferred maintenance. The same principle applies to replacing your roof or other significant repairs needed.
If you are planning to do work on your home:
- First, determine if you can afford this project and how quickly it needs to be done. A key financial principle is that the renovation will cost you less if you have saved up the money before you start the renovation.
- Establish a budget for what the total renovation will cost. Estimate your debt payments divided by your monthly income to determine how much you can afford. Otherwise, abandon the idea of using any type of top up loan, and wait until you have saved enough to pay cash or can manage with a smaller loan.
- If your roof is leaking, check the cost of making short-term repairs to give you more time to save up more for the full cost of replacing the roof.
Investments that may add value to your home include:
- Installing or adding additional insulation
- Installing double glazing
- Installing solar panels and potentially a battery
- Adding new rooms
You need to think about these investments from a cost-benefit basis. That means calculating what the project will cost and how much your home will increase in value. Insulation and solar panels will reduce your energy cost but is the benefit higher than the cost? Borrowing money to pay for these investments adds to the total cost, so may reduce the financial benefits. Even if you have cash to make these investments, there is still a cost to you. That’s because when you use your savings, you are reducing the amount of interest you would earn if you didn’t invest in the home improvement.
Suggested steps for major renovations
- Get a valuation done and an estimate for how much the renovations will add to the value of your home.
- Calculate the equity you have in your home.
- Get a solid estimate of renovation costs.
- Review your budget to confirm what you can afford to pay.
Consider the following:
- Can you realistically manage both payments—not just today but in years to come?
- Have you thought through the “what-ifs” that might impact your income
- Do you have a solid emergency fund?
- Do you have the ability to pay off the loan faster to reduce the amount of interest you pay?
- Try out the calculators on the Crown and Sorted websites to see how much a top up loan will cost you.
Consider the times, pray, and seek wise counsel. If you’re married, make sure you are united in the decision. Ask God for wisdom; He gives it generously without reproach.
“A house is built by wisdom and becomes strong through good sense.
Through knowledge its rooms are filled with all sorts precious and riches and valuables.” Proverbs 24:3–4 (NLT)
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