Have you taken a home loan, but need additional funds? To help customers with the extra financing amount, banks offer top-up home loans. Let’s take a look at five things you need to know about top-up loans before applying.
Interest Rates and Loan Tenure
Top-up loans are a preferred option as they come with a much lower interest rate when compared to personal loans. Check with your bank if you are eligible to opt for a top-up loan and how much financing you can get. Usually the interest rate is a little higher than the interest rate of the mortgage loan (Base Rate + spread). If you have opted for a variable housing loan, the interest rate will depend on the present Effective Lending Rate. The loan tenure will be similar to that of a home loan (up to 30 years).
Purpose of the Loan
A top-up home loan is mostly taken for property renovation. However, you can also take it for wedding expenses, business investment purposes, medical expenses, or for any other emergencies. The bank could ask you the purpose of the top-up loan in order to rule out any speculative motives.
The Financing Amount
Debt Service Ratio (DSR) measures your ability to repay your debts. It is one of the important factors banks take into consideration to decide your top-up loan financing amount. DSR is calculated by dividing your monthly income with your total monthly instalments. If your DSR is low, you can expect lesser financing and vice versa. It is advisable to check your DSR before applying for a top-up loan so that you will have an idea how much you will get.
Loan applicants are asked to take insurance if they have less equity or if the financing amount exceeds the value of the property by 70% to 80%. If you haven’t opted for takaful/insurance for your mortgage loan, the banks would advise you to take it for the top-up loan.
The Loan Agreement
Top-up loans are usually offered by the same bank from which you have taken your mortgage loan. You must check with your bank how the loan agreement will be redrawn. While some banks stamp the previous mortgage loan agreement, you might come across banks that will redraw a new agreement. Whatever the case, the costs involved are lesser as you already have a loan with the bank.
You must go through the loan agreement in detail to understand how much interest you will be paying per loan (mortgage + loan amount) and the total monthly instalment. Also, if your home loan was a 30-year one and you have applied for a top-up loan after 15 years, there could be new terms and conditions applicable to new loans. Go through these in detail to avoid any confusion in the future.
Taking a top-up home loan is one of the easiest ways to finance your short-term or long-term financial goals. Since you already have a loan with the bank, the documentation and approval processes won’t take much time.
A top-up home loan comes with a much lower interest rate when compared to a personal loan. Whether you have taken an Islamic or conventional home loan, check with your bank if they provide a top-up loan scheme on your existing loan.