Can you borrow more against a mortgaged home? Funding for worry-free renovations

When it comes to New Zealand property in 2021, the two hottest topics are subdividing large sections and renovating older homes. Experienced developers with substantial capital are eyeing large sites with subdivision potential, while investors with some spare cash and investment properties hope to renovate older homes to increase their value and generate further profits. Those facing the greatest difficulty are people who need a home but can only watch as prices remain high year after year. Even those who stretched themselves to take out a mortgage and buy in the past couple of years find their spending power constrained by repayments. Simple upgrades to improve their quality of life are repeatedly postponed as they make do.

What many people do not realise is that even a mortgaged home can be used to obtain extra funds through a loan top-up, releasing some of the property's increased value as cash to spend where needed. Common uses for top-up loans include renovations, interior improvements, appliances, and even buying another property or a car. 

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Top Up loans: a quick, convenient way to borrow more

A top-up loan is a way to access unused equity, or equity gained through an increase in value, in a mortgaged asset through your existing lender. Equity available for a top-up = property value × permitted loan-to-value ratio (LVR) − existing borrowing. For example, if a house purchased for NZ$900,000 rises in value to NZ$1,250,000 after 5 years, that increase may allow you to borrow some cash from the bank through a top-up.

In other words, if your existing owner-occupied home has value available beyond your current borrowing, you can apply to release some of it as cash through a top-up. If you have no mortgage but your home has increased in value, you can also apply for a top-up loan, provided you have a reasonable purpose and supporting evidence, and your income and application documents meet lending requirements.

Compared with applying for a new loan, a top-up has clear advantages. Applications are more convenient and faster because your existing lender already holds your detailed information, allowing it to process approval more quickly. A top-up may also avoid penalties: some loan contracts require borrowers to stay with the bank for a specified period, and switching lenders early to apply for a new loan may incur break fees. A top-up can therefore be a good way to release some of your property's increased value as cash.

Of course, there are disadvantages too. First, a top-up must be obtained from your existing lender. As each bank has different limits and eligibility requirements, your current lender may not offer the best borrowing limit or loan product, such as a large-limit account. Second, a top-up generally does not involve restructuring your existing loan, such as extending its term or switching from principal-and-interest repayments to interest-only payments. Smaller top-up loans, such as those of around 100,000, generally do not come with a cash contribution.

 

An increase in property value is a prerequisite for a Top Up loan

Whether your property has increased in value—in everyday terms, whether its price has risen—is a fundamental prerequisite for a top-up loan. Banks generally use an estimated value (EV) to assess price growth, rather than the commonly discussed capital value (CV). CV is a government valuation carried out every 3 years, whereas the actual market changes daily. Banks therefore look at a property's EV rather than a CV that remains unchanged for 3 years.

There are two main property information providers in the home valuation sector: CoreLogic and Valocity. Their valuation products are very similar. Both collect recent property sales data and combine it with other relevant information, using calculations within the banking system to value a property and produce an updated EV. New Zealand's major banks generally use one of these providers' valuation services.

You therefore need to consult a mortgage adviser or bank manager to find out your home's current EV. If it has risen, ask whether a new property valuation is required; this depends on the circumstances. If the final valuation confirms that the property has increased in value, there will be scope for a top-up.

By this point, many readers will be wondering how to calculate the scope for a top-up: the maximum amount that can be borrowed against the property's increased value. Let us use a New Zealand property purchased for NZ$1,000,000 with a loan-to-value ratio (LVR) of 80% as an example:

Mr Zhang asks a property valuation firm to reassess his owner-occupied home, originally purchased for NZ$1,000,000. Once its current value is confirmed as NZ$1,200,000, he can seek additional borrowing against it. The property is now worth 1,200,000 rather than 1,000,000, so the borrowing limit, still at an LVR of 80%, becomes NZ$960,000. After deducting the original loan of 800,000, Mr Zhang can release up to NZ$160,000 in cash for other investments.

Of course, property value is not the only factor determining whether a bank will lend, or how much. The example above is simply an introduction to calculating potential borrowing against an increase in value. Releasing the maximum amount also depends on the other conditions discussed below.

 

Your financial position determines the size of your Top Up loan

Lending depends on both the property's value and the borrower's borrowing capacity. Banks assess this capacity through income—in other words, your financial position. However valuable a house is, it is of little use without income. It is like having a tall glass but no continuous water supply: however tall it is, it remains empty. Because income determines your borrowing capacity, it is best to consult a mortgage adviser before applying, to calculate whether your income and repayment capacity meet the bank's lending requirements.

In the example above, Mr Zhang's NZ$1,000,000 house has risen in value to 1,200,000. Based solely on an owner-occupied LVR of 80%, a property worth NZ$1,000,000 supports borrowing of 800,000, while one worth NZ$1,200,000 supports borrowing of 960,000. The potential top-up arising from the increase in value is therefore 960,000 − 800,000 = NZ$160,000.

But how much can Mr Zhang actually borrow? That calculation requires income to be factored in.

Scenario 1：If Mr Zhang's original loan of NZ$80 was the maximum his income could support—commonly described as borrowing to the limit—and his income has neither increased nor decreased, his borrowing capacity remains unchanged. The increase in property value alone is the empty glass described above. Without income to supply the water, he cannot borrow any more, even though his home has increased in value.

Scenario 2：Mr Zhang receives a pay rise, bringing his annual salary to NZ$115,000. His borrowing capacity therefore increases: there is now more water to fill the empty glass. The additional income is the water supply, representing increased borrowing capacity. With his current annual income of NZ$115,000, he can borrow around NZ$900,000. After subtracting his existing NZ$800,000 loan, he can obtain a top-up of 100,000 for renovations or alterations.

Scenario 3：Mr Zhang's income rises to NZ$200,000, so the water supply now exceeds the glass's capacity; the height of the glass becomes the only constraint. In other words, his borrowing capacity is around NZ$1,600,000, but with a total property value of 1,200,000 and an LVR limit of 80%, he can use only NZ$960,000 of that capacity. A top-up on his existing loan can therefore release at most NZ$160,000. His remaining borrowing capacity could be used for a new loan to buy another property.

Please note: these examples consider annual salary only, excluding all other expenditure and income. Actual circumstances are more complex and must be assessed individually. We recommend asking a professional lending manager or bank manager to work through the calculations with you. A sound borrowing plan can help lay a firm foundation for building wealth.

 

Your credit history directly affects loan approval

Banks are financial institutions with strict risk controls. When assessing loan applications, they closely examine customers' credit records and credit scores to determine whether they have sound financial habits. Before formally submitting an application, make sure you check for adverse records such as late repayments or overdue bills. It is also advisable to close credit cards that have not been used for a long time.

If you frequently make late credit card payments or fall into arrears, have large unexplained expenses, or make cash deposits and withdrawals you cannot explain, the bank may regard you as having poor financial habits. This directly affects loan approval: the bank may approve only a small amount or decline the application altogether.

 

Case studies:

Case one:

Mr Wang and his wife bought an owner-occupied home on 860 square metres of land in 2016 for NZ$960,000. Mr Zhang paid a deposit of NZ$400,000 and borrowed NZ$560,000 from the bank. In 2020, the home was valued at NZ$1,350,000.

Mr Wang and his wife planned to build a 28-square-metre granny flat in their backyard, allowing 2 rooms in their existing home to be rented out. After speaking with a designer, they learned that the granny flat, furniture purchases and renovations would cost around NZ$250,000. However, they had only 30,000 in cash and wanted to borrow the remaining funds.

After speaking with the couple, the lending manager learned that their annual household income had risen from NZ$95,000 in 2016 to NZ$130,000, and their household had grown from two people to three.

With both their property's value and their income having increased, the lending manager calculated that the couple could obtain a further top-up of at least 490,000 against their home. They needed only NZ$200,000, so, based on their circumstances, the manager arranged a loan of 230,000 and suggested that their current financial capacity would also allow them to buy an investment property for future investment.

   

Case two:

Ms Li's owner-occupied home had increased in value from NZ$830,000 to NZ$1,170,000. After learning that Mr Zhang and his wife planned to develop their backyard, she was also keen to do so through a top-up loan.

After speaking with Ms Li, the lending manager found that she worked in tourism and had lost her income after March 2020 because of the pandemic. Her current part-time work paid very little, far below what she had earned when buying her home. As her income did not meet the bank's lending requirements, she could not obtain a top-up loan and was therefore unable to develop her backyard.