Showdown: top up vs line of credit

They both have pros and cons, but what’s more appropriate for you? Helen Collier-Kogtevs explains.

Top up

When you top up your loan, you’re essentially making your existing loan bigger. Think of it along the same lines as increasing the limit on your credit card: you have the same product with the same lender, so you’re simply increasing the level of debt on that particular loan.

A top up allows you to get more money out of an existing property, by revaluing the property and ‘topping up’ the existing loan facility.

Again, let’s refer to our earlier scenario of a property that is now worth $625,000, up from $500,000 when you bought it. The existing loan on this property is $400,000. To top up this loan, you would approach your existing lender and apply to increase your loan facility, based on the new valuation. If all proceeds smoothly, the lender would then increase your loan to become a $500,000 mortgage.

  • If you stay within the same LVR bracket as the original loan, you won’t be required to pay any further LMI. For instance, if you originally had an 85% lend against a $500,000 value, you could top this up to an 85% lend against a $625,000, and no additional LMI is generally payable.
  • You don’t have to apply again with a new lender; all of your details and documents are on file. Note that you may need to supply some updated financials, such as tax returns or pay slips.
  • No new account establishment or account keeping fees.
  • Your repayments on your loan will increase in line with your top up, but there is no clear division on paper between your previous loan repayments and the value of the top up loan amount. If you are toping up a personal PPOR loan and using the funds for investment purposes, this could create some problems for the purposes of tax management.
 In most instances, a top up loan is the easiest and most effective way to proceed if you wish to access equity in your portfolio.

Line of credit

A line of credit (LOC) is similar to having a giant credit card limit, where interest accrues only on the outstanding balance.

Let’s say you have a line of credit for $200,000; if you use $50,000 of this LOC for a property deposit, then you only pay interest on that outstanding amount.
If you then use a further $40,000 to fund a property renovation, then you will be required to pay interest on $90,000.

  • These are very flexible loan products that allow you to access funds quickly and easily, without needing to apply for a new loan.
  • Depending on your loan and strategy, you may be able to pay your loan interest payments using your line of credit; this is only suitable in certain situations, such as when you are developing or substantially renovating to add a lot of value.
  • You only pay interest on the outstanding balance.
  • A line of credit is a specialised loan product and as result, it often comes at premium. You will generally pay a higher interest rate for a LOC than you would on a standard variable loan, as you hand over extra money for the privilege of flexibility.
A LOC is can be secured against equity across your portfolio, or against a particular property. Generally speaking, if you wish to access the equity in your portfolio, line of credits are not necessary, unless you are running a real estate business and you are making daily transactions against the loan.

For most investors, a simple standard variable mortgage with interest-only payments is ideal, you will usually only need to access the funds when you are ready to use them.

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