Give Yourself A Top-up
Sydney Morning Herald
Wednesday November 18, 1998
THE standard variable home loan is beginning to look a little staid next to its more glamorous alternative: the equity home loan. But with a bit of hard work you can get this trusty old product to do the same sorts of things and save money to boot.
One of the main stumbling blocks on the standard loan is that you can't draw back to the original loan amount as easily as you can with the equity product. But, depending on your lender, you may find it easier to do than you originally thought.
Peter Hanlon, the head of relationship markets at Westpac Bank, says: "Top-up is a quick, simple and inexpensive way to borrow for a variety of needs - a renovation, school fees or a holiday. You can top-up to the original amount for any worthwhile purpose."
The standard home loan of a decade ago looks nothing like the product we have today. Salary mortgages, 100 per cent offset facilities and redraw facilities all permit borrowers to transact on their home loan with a high degree of freedom.
You can put savings and salary into the mortgage in the knowledge that you can access the extra funds later, often through ATMs and EFTPOS. Meanwhile, the money is working away in your account to slash the interest payable and cut the term of the loan.
However, lenders have been heavily promoting their equity products - also referred to as revolving line of credit loans - in recent months. They have every incentive to sell more of them because they give lenders a bigger margin.
Although competitive pressures have steadily forced their interest rates down, equity loans usually cost more than the standard variable product. They generally carry rates of 0.5 to 1 percentage point higher and they also have steeper annual fees.
While both products look and behave similarly, which makes it confusing for borrowers, there are key differences. The standard loan is an amortising product - that is, the amount owed reduces over the term of the loan (repayments consist of principal and interest).
The equity loan is like a huge revolving line of credit, so there is no set repayment schedule. As long as you meet your monthly interest charges, there is no obligation to pay down the loan.
But in practice borrowers do, using the product's flexibility to clear the debt quicker.
The other key advantage of the equity loan is that you can draw back up to the original loan amount, if needed, to fund other activities such as share investments or a second property.
The standard variable is sluggish on this score. You can only redraw the extra "buffer". You cannot draw back up to the original loan amount without going back to the lender. While it ensures you remain on target, so the debt is retired on time, it can be limiting.
The only way around the problem is to go for a top-up. Providing your financial circumstances haven't deteriorated, most lenders will let you draw back to the original loan amount. However, their methods and fees vary.
Some will top-up your existing loan for about $300, while others insist you take out a new loan and pay another round of establishment fees. ANZ prefers borrowers to take out a supplementary loan for $100 with the old one continuing.
Cassandra Williams, a financial analyst at Cannex, says amortising loans are getting more like equity products.
"Originally, the reason people took out a revolving line of credit was to access the money, but you don't need a high-interest loan for that any more," she says. "The standard loan can act like a 'revolver'."
Williams advises that if you are thinking of taking out an equity product because you may need to borrow up to the original amount in future, you should check out your lender's top-up facility first - it's almost certainly going to be the cheaper option.
You will pay a one-off top-up fee of about $300, compared with the annual fees of $250 for an equity loan.
If your lender suggests you take out a second loan (like ANZ), she recommends you ask whether this means your home loan will have two sets of ongoing fees.
Bill Rankin, the national lending manager at Mortgage Choice, says you shouldn't have to pay the full application fee when topping-up as most of the paperwork, including the valuation, has already been done.
"If you are simply looking to top-up, you ought to negotiate the fees with your lender," Rankin says.
"Your alternative is to refinance the loan and extend it with someone else. Under those circumstances, they might come to the party rather than lose you."
Borrowers seeking flexibility should consider an amortising loan first. "You have to work at it a bit more and there are some costs associated with it but these days the standard variable will do just about anything," he says.
Equity loans are more suitable for the self-employed or for active investors who need ready access to cash without any questions being asked. If you anticipate a drop in income, Rankin says there may be a case for opting for an equity product.
Hanlon says borrowers may be able to top-up to more than the original amount. "You may have taken out a loan for $100,000 five years ago," he says. "Through normal repayments you now owe $80,000, but the house has gone up in value from $150,00 to $200,000 and allows you to top-up to $130,000." He says top-up accounts for 20 per cent of their lending.
Borrowers should ask how often they are likely to need it, he says. "If you are likely to need it to build the extra bedroom and then for the big overseas trip, top-up's the way to go. But if you are going to be doing it
frequently and it [the loan] becomes like a big transaction account, go the equity route."
But Hanlon says you need to take care with an equity product. "If you keep paying it off and regularly reborrowing it, you may be in the situation where you never pay off the loan. You have to think about it carefully and match the loan to your own requirements."
EQUITY LOANS - Give you ongoing credit - you can pay it down and redraw it at will
TOPPING UP YOUR LOAN: WHAT IT COSTS
Interest Upfront Ongoing
Company Product Name Rate %
AAPR % Fees Fees
AMP Banking All Options Home Loan 6.47 6.58
$600 Nil
Aussie Home Loans Aussie Home Loan 6.49 6.63
$800 Nil
ANZ Bank Money Saver 5.99
6.19 $600 $8/mth
ANZ Bank Standard variable 6.70
6.70 Nil Nil
Commonwealth Economiser 6.15
6.35 $600 $8/mth
Commonwealth Complete Home Loan 6.80 6.90
Nil $8/mth
National Standard variable 6.70
6.87 $600 $5/mth
RAMS Basic Home Loan 6.15
6.41 $810 $120pa
RAMS Series 2 Better Home Loan 6.49 6.68
$1,085 Nil
Colonial State Rate Saver Home Loan 6.15 6.38
$750 $8/mth
Colonial State Standard variable 6.69
6.92 $750 $8/mth
St George Great Australian Home Loan 6.15 6.36
$650 $8/mth
St George Standard variable 6.80
6.92 $650 $5/mth
Wizard Wizard Direct 5.85
5.96 $621 Nil
Wizard Fully Optional Variable 6.25
6.38 $721 Nil
Westpac First Option Home Loan 6.19 6.39
$600 $8/mth
Westpac Premium Option variable 6.69 6.89
$600 $8/mth
Increase funded by new facility
Increase funded by old facility
Notes
AMP Banking No
Additional advance $300
Minimum advance $5,000 if additional
security $250
Aussie Home Loans No
Loan variation $400
Minimum variation of $10,000
ANZ Bank Yes, old loan will continue with supp. loan for ex
amount. $100 fee (waived 30/11/98)
No
-
ANZ Bank Yes, old loan will continue with supp. loan for ex
amount. $100 fee (waived 30/11/98)
No
-
Commonwealth Yes, old loan will continue with supp. loan for ex
amount. Application fees will apply.
No
-
Commonwealth Yes, old loan will continue with supp. loan for ex
amount. Application fees will apply.
No
-
National New loan required. Standard app. fees.
No
-
RAMS No
Increase application fee $295, valuation
(after 6 mth) $150. Mortgage ins. $160 approx
-
RAMS No
Increase application fee $295, valuation
(after 6 mth) $150. Mortgage ins. $160 approx
-
Colonial State No
Additional advance $350 (50% of
application fee)
-
Colonial State No
Additional advance $50
-
St George New loan required. Standard app. fees.
No
-
St George No
Add on loan at cost $400
-
Wizard No
Increase loan. Valuation $200 (if
required), documentation $350 approx
-
Wizard No
Increase loan. Valuation $200 (if
required), documentation $350 approx
-
Westpac No
Top up fee of $450
Maximum top up of $100,000
Westpac No
Top up fee of $300
Maximum top up of $100,000
Note: Increase loan in loan amount is dependant upon the normal loan approval
criteria. Additional fees may be incurred if exceeding limit of original loan or
LVR requirements.
Source: CANNEX
© 1998 Sydney Morning Herald