Personal loans vs Home loan top-up: Which is right for you

If you’re looking to upgrade your car or renovate your home, you’re possibly considering borrowing money to finance it. This can lead you to weigh up whether to get a new personal loan or top up your existing home loan. However, before you rush into thinking the lower interest rate on your home loan is the better option, it’s worth considering a few things.

Is a lower home loan interest rate really better?

Using your home equity to finance a car purchase or home extension is a very common option for many homeowners. Home loans offer lower interest rates and lower loan repayments due to the longer terms compared to personal loans. The process also tends to be a pretty simple affair taking into account your bank will have a good idea of your credit history. However, while a home loan may offer a lower interest rate than a car or personal loan, you may end up paying more interest over the life of the loan.

For example, take a $20,000 home equity loan with an interest rate of 4% p.a. over 30 years. By making monthly principal and interest repayments you would incur $14,374 in interest over the life of the loan. In comparison, a $20,000 car loan at 6.79% p.a. over 7 years will incur $5,184 interest over the life of the loan when making monthly principal and interest repayments. So, if saving money on interest is important to you, a personal loan could be the way to go.

Do you want certainty over interest rates and repayments?

If you prefer certainty around your loan repayments, a personal loan may be more suitable. Home loan interest rates are usually variable or fixed for a certain period before reverting to a variable rate, while fixed rate personal or car loans offer fixed interest rates for the life of the loan. It makes budgeting much easier and provides greater peace of mind. If possible, find a personal loan that allows you to make additional repayments or pay out the loan early without being penalised.

Does the size of loan repayments matter?

The size of your loan repayments can really impact your household budget, so it’s worth taking this into account when borrowing money. Generally, the minimum monthly repayments will be lower with home equity loans than a car or personal loan of a similar amount. This is due to home loans having longer loan terms than personal loans. This can make a big difference in your decision if there isn’t much room in your budget. But be aware that these short-term benefits could potentially have longer term impacts with additional interest being paid over the life of the loan.

Other things to consider

There are other factors worth considering when comparing a new personal loan and topping up your existing home loan. Obviously home loans have longer terms (usually 20-30 years) compared to personal loans (5-7 years). This can affect your decision if your objective is to be debt-free and want to achieve financial freedom. Another important thing to consider is the security used for your loan. If you’ve topped up your home loan, it’s important to know that if you can’t repay the loan then you potentially run the risk of losing your home.

Whichever type of loan you choose really depends on your financial situation and your objectives and needs. Talking with your personal banker can help you make the right decision.

Back to Guide
Related articles