In previous article, we have talk about what is refinance, how its work as well as its process. Let us summary all about this. Refinancing is the act of taking on a new mortgage loan with different terms. The reasons for homeowners and property investors to consider to refinancing their loan are to lower the interest rate, shorten the loan tenure or using the cash out from refinancing to purchase another new property, property improvement, pay-off outstanding personal loan and etc.
On the other hand, you might heard somebody else said about top-up loan and you might confuse is it same with refinance or what does it mean. In today, we will tell you what it’s all about as well as let you know the pros and cons of top-up loan. Let’s begin;
What is top-up loan?
Top-up loan is an additional loan on top of the current mortgage outstanding balance and it is based on the appreciated market value of the borrower’s collateral. Some of the banks may open a separate account for the additional top-up (i.e. 2 accounts to be serviced) with 2 interest rate while some of the banks may just top it up on the same account with a new single interest rate which means to continue with the same mortgage loan account. And it is depends on every each bank policies.
For example, let say Jenny bought a condo 9 years ago with a RM 120k loan from Bank A.
Total Loan Amount: RM 120k
Outstanding Amount in 2014: RM 100k
Loan Tenure: 30 years
Interest rate: 4.5%
Monthly repayment: RM 608
After that, Jenny has apply for a top-up loan.
Market value: RM 250k
Bank A offer Jenny a 80% of market value less outstanding loan amount (i.e. [80% x RM 250K] – RM 100K) after assessing her Debt Servicing Ratio (DSR) and other factors into account. The new numbers are as below;
Top-up loan amount: RM 100k
Loan Tenure: 25 years
Interest rate: 4.8%
Monthly repayment: RM 573
Thus, Jenny’s total monthly repayment will be RM 1,181 which is RM 608 + RM 573.
Besides, you can only proceed with the top-up loan with the same bank from your existing mortgage loan and sometimes, the bank would like to follow all the terms and conditions of the existing mortgage features. In addition, top-up loan is suitable for the borrowers who need for an immediate cash out.
It goes without saying that a top up loan can only be done with the existing financier. But the advantage is that existing loan documents only need to be up-stamped, compared to redrawn from scratch in the case of refinancing. As such, the entry costs are much cheaper. Additionally, early termination penalties will not be invoked by the current financier.
What its pros and cons?
👍 You’re no need to redo all loan agreements
👍 Minimal fees (because the existing loan agreements only need to be up-stamped compare to draft a new one in the case of refinancing)
👍 Shorter processing time as compared with refinancing (since you’re done this with the same bank of your existing mortgage loan)
👎 You’re unable to change some items such as Effective Lending Rate (ELR) and existing mortgage loan tenure (hence, you’are unable to enjoy the lower interest rate as well as shorten the loan tenure)
👎 You may need to service or pay into 2 different accounts should the existing bank open a new account on the top-up loan.
👎 The top-up amount might be limited as other banks may offer higher bank valuation on the property. (since you have to done this with the same bank of current mortgage loan, so you’re unable to compare the deals that offered by other banks.