Home-owners are using rising property values and increased equity to top up their mortgages, by nearly $93 billion in the last year. They are spending the money on renovations, cars and investment properties – or to prop up struggling businesses.
During June, mortgage top-ups soared to about $10 billion, up 17% on the same month last year, with loans by owner-occupiers rising nearly 30%, according to government statistics.
Mortgage brokers say top-ups have boomed as the nation’s property markets posted double-digit growth, with interest rates are at record lows.
Most lenders have replaced traditional products such as lines of credit with top-up loans, or supplementary loans, using property equity as security. Lines of credit came under fire because of the risk that borrowers redrew repayments, rather than paying down the loan over time.
Most lenders have replaced them with top-up mortgages, typically a new loan based on how much equity is available in the property and the borrowers’ capacity to repay.
But they are not available for all home loans. For example, Commonwealth Bank will not allow top-ups for fixed or guaranteed interest home loans without breaking the original contract.
Rates for the loans also vary, so it pays to shop around for the best deal. Sally Tindall, research director of RateCity, says the average interest rate on a top-up loan is around 2.6%, compared to about 5.8% on a personal loan and more than 17% for credit cards.