Mortgage Top Ups and LVR Restrictions

Most of you would have heard of a “top up”, but for those that have not, it is essentially the process of people with existing mortgages going back to the bank and asking for more money to do several different things... Whether that be renovating your bathroom, buying a new car, installing solar panels or investing money elsewhere. As long as you pass the bank's loan assessment, you should be OK to borrow again against your house.

The two biggest factors involved in this bank assessment is whether you can afford the loan, and whether you have enough value in your property to support it. With property values decreasing like they have been, and therefore the equity borrowers have in their property decreasing as well, the limits to bank policy is being tested now more than ever and so sharing these limits seemed pertinent.

Yes... What your property is worth is very important, but the LVR restrictions that are in place do have exceptions that are often made when first purchasing the property, and little-known exceptions when getting a top up. Banks do have access to some funds that can be loaned to customers with less than 20% equity in their home and getting a top up is no different.

Let us take a recent client’s request as an example. Their house was worth $800,000 and they had $610,000 in lending and therefore a Loan to Value Ratio (LVR)of 76.25%. They wanted $80,000 to put towards renovating their kitchen and bathroom and getting the property up to a higher standard for their growing family. The bank approved this application for them to go to 86.25% LVR on their property which gave them the opportunity to stay in their home, keep the family where they are and ensure the house fits everyone and everything it needed to.

The top up portion was fixed at a higher rate without special discounts because of the low equity nature of that loan, but no margin or fee was charged on the existing loans, and this was priced as an isolated facility.

This was an excellent way to get the clients the funds they needed without going down the unsecured route or messing with their existing home loan. It is also likely that with the work done and a little bit of capital gain, they could be in an equity position to refix the lending at prime interest rates much sooner than you’d think

Process

Approaching a mortgage adviser should always be step 1 when thinking about getting home lending and a top up is no exception. Here are a few things to consider:

• This is a home loan. A full mortgage application will be needed with evidence of income, expenses and debts etc. This could be made easier if all of your banking is together at the same bank, but still... not as simple as an email.
• You will need a registered valuation. There is little to no chance you’ll be able to get out of it either and you will have to cover the cost. When banks are lending more than 80% of the value of the property, they like to make sure the value figure they are working with is reliable, hence this requirement. We all know banks are very careful and this is more evidence of such as they make sure their position isn’t extending them past their risk appetite. (N.B: Valuations can cost between circa $800-$1,400 depending on location).
• When looking at renovation lending, the value of your house today is obviously not the value after the renovation is complete. Banks are aware of this and are receptive to lending more than 80% of the upon complete value (value of your house once the renovations are done). They will release funds gradually throughout the process and may ask more questions, but still a great way to source renovation lending.
• Loan purpose is key, and banks are required to only lend money for certain purposes. For smaller loan amounts (under circa $30k) an email outlining understandable reasoning should suffice. When larger loans are being requested, more questions will be asked, and quotes and invoices may be required to ensure money is being spent on the purpose it was requested for

If you are in need of a top up but do have concerns about your homes value don’t hesitate and reach out today.