Top Up Mortgage to Clear Home Improvement Loan?

Background:

We are currently in our home 11 years. We love the area but we are aware that we are likely to outgrow the footprint of the current house in the future (I would think around 7 years from now when kids are slightly older).

Assuming additional space is necessary, our ideal situation would be to top up our mortgage to extend the existing house as we love where we are. We haven’t even considered having a conversation with a builder or anything like that, so what we want to do may not be possible but neighbours with a similar type house have extended successfully in the past. Ultimately though we may need to move. At this stage all we are trying to achieve is to put ourselves in the best financial position if / when we get to a decision around extending or indeed moving. We are trying to avoid making a decision now which may hamstring us in the future unintentionally.

Current Situation:

At the moment we are 3 years into a 10 year home improvement loan with €27k remaining at 4.25% (€370 PM). We can pay off this loan early without penalty. We also have a mortgage balance of €270k with 22 years left and an approximate LTV of 58%. This is fixed with UB @ 2.6% (€1,350 PM) with 18 months remaining.

My question is what are people’s views on topping up (that the right word?) our existing mortgage to clear the home improvement loan? We would then overpay monthly (in accordance with UB terms of 10% of balance) so that our net outgoings between the existing two loans remain unchanged when we roll them into a single mortgage repayment. From my calculations we would be in a better position at the end of 7 years (remaining term on home improvement loan) than if we left them separate.

Considerations:

Is topping up the mortgage an accepted practice to clear a loan that relates to the home?

Are we breaking out of our current fixed term by adding on this amount and do we need to refix as a result and pay the relevant breakage fee? If breaking, the high value UB rate of 2.2% for 5 years does look appealing although concerned with upcoming announcements about them potentially exiting the market. Our new LTV with the mortgage and home improvement combined would be c. 64%.

Can you only top up once for a mortgage e.g. an extension in 7 years may cost €150k for which we would require another mortgage top up. If we have already topped up to improve the home once before would this cause an issue for banks and prevent us from doing same again?

Finally I had thought as part of the process that if I am going to the trouble of combining the mortgage and home improvement loan than rather than overpay should I just reduce the term as part of the process but again with the same existing outgoings. Both our jobs are secure but from what I’ve read here most advocate retaining the flexibility an overpayment allows rather than tying yourself into a formal repayment schedule which becomes very difficult to amend should you encounter unforeseen financial issues in the future. I also think that if we did this we would need to once again extend the term to make the repayments manageable if we were to top up. Reducing the term only to extend it again might not be a smart approach.

Would be very grateful for any views and comments on things I may be missing. Thanks everyone!

AllAboutNumbers said:

Is topping up the mortgage an accepted practice to clear a loan that relates to the home?

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This is your first question before you over think it. Check if the bank would even do this.

Top-up mortgages are very restricted at the moment. You might be able to get a top-up to complete home improvements, but not to clear an existing loan. Only your mortgage provider will be able to tell you their policy.

RedOnion said:

This is your first question before you over think it. Check if the bank would even do this.

Top-up mortgages are very restricted at the moment. You might be able to get a top-up to complete home improvements, but not to clear an existing loan. Only your mortgage provider will be able to tell you their policy.

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Thanks RedOnion - I will ring them this afternoon and see what they say. I suppose it was more of is there a blanket approach from banks to this or does it depend on the individual lender and their policy. You are 100% right though I need to start with UB as without that info it kind of torpedos the whole proposal! Will let you know what they say.

Previous post on the topic suggests UB might be flexible on it for amounts up to 30k.

RedOnion said:

Previous post on the topic suggests UB might be flexible on it for amounts up to 30k.

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Thanks again RedOnion - I know the landscape has changed with Covid but still interesting piece. I rang UB and they said that is something that would need to be discussed at Branch Level so they've requested a call back. The UB rep on the phone called it "debt consolidation" as we would be using the money to clear an existing loan. Not sure if it means we are breaking out of our existing fixed term if they were to agree to it. Guess we'll know a bit more after that call.

Usually, assuming they will do it as it is debt consolidation as they said, a top up is a separate loan to the existing mortgage, it runs alongside the existing one for the remaining term but is at whatever today's rates are, your existing mortgage stays the same. That is the top up option and there is an upper limit to the amount that can be done this way, used to be around 70k

Total remortgaging is the other option and usually for amounts over the top up limit and involves taking out a brand new mortgage with UB for amount of old mortgage plus extra required. In that case you lose your existing mortgage and the rate it is on and all of the new one is at today's rates.

So a top up might be fine for clearing the existing shorter term loan if they do it but if you need more again in the future you are likely to be pushed over the limit for top ups and would have to go the remortgaging route.

Monbretia said:

Usually, assuming they will do it as it is debt consolidation as they said, a top up is a separate loan to the existing mortgage, it runs alongside the existing one for the remaining term but is at whatever today's rates are, your existing mortgage stays the same. That is the top up option and there is an upper limit to the amount that can be done this way, used to be around 70k

Total remortgaging is the other option and usually for amounts over the top up limit and involves taking out a brand new mortgage with UB for amount of old mortgage plus extra required. In that case you lose your existing mortgage and the rate it is on and all of the new one is at today's rates.

So a top up might be fine for clearing the existing shorter term loan if they do it but if you need more again in the future you are likely to be pushed over the limit for top ups and would have to go the remortgaging route.

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Thanks Monbretia, I wasn't aware they were different things!

With the top up sitting in what I understand to be a separate account how do my mortgage repayments work? Does my monthly payment come off the main account or the new top up account or do I specify the split each month?

By remortgaging if I can get a more attractive rate eg 2.2% vs existing 2.6% is there a reason why I wouldn't just remortgage as on the face of it that would be more beneficial? No messing with sub accounts and I end up with a more attractive rate. Am I being too simplistic as just seems the remortgage has no down side?

Thanks again everyone as I learn more with each post and response.

With a top up your existing mortgage and repayment on that remain the same and there is a separate payment to the top up.

Remortgaging is slower as same as brand new application either where you are or elsewhere and has legal costs but some lenders might be covering that for switching. Top ups have no fees and are much quicker as more similar to a personal loan, application form not as long etc.

The big downside to a remortgage would obviously be more for someone who had a rate such as a tracker that they could not better by remortgaging and would not want to lose by amalgamating the amounts into one loan. Having the original and a top up is no problem really and not that messy, just means two payments come out every month rather than one, all things being equal rate wise etc it costs no more and is the banks way around having to do a full remortgage every time someone wanted to top up what they consider a small amount.

Now I don't know what way things are these days but in the past a top up could be processed and drawn down within a week whereas you are talking a lot longer for a new mortgage application.

Hi @AllAboutNumbers, I'm in a slightly different situation - saving like mad with a view to starting renovations in a year, and looking at how best to finance above the savings with loans. I'd be really interested if you could share any details of your dealings with UB on this. I believe if you go the top-up route with UB, you are limited to an equity release of up to 80% of the value, and unless given an exemption you are still constrained by Central Bank LTI rules. The top-up part, I think, is also a variable rate loan (obs higher than a fixed rate, but means you can overpay it as much as you want). However, this is just me guessing as UB are very sparse on info on their site. I'd be very appreciative of any details of what they say to you., such as if it's a quick process and drawdown like Monbretia says it used to be. Let's just say my experience with form filling with UB the first time around was somewhat gruelling! Do you need to engage a solicitor again?

nephster said:

Hi @AllAboutNumbers, I'm in a slightly different situation - saving like mad with a view to starting renovations in a year, and looking at how best to finance above the savings with loans. I'd be really interested if you could share any details of your dealings with UB on this. I believe if you go the top-up route with UB, you are limited to an equity release of up to 80% of the value, and unless given an exemption you are still constrained by Central Bank LTI rules. The top-up part, I think, is also a variable rate loan (obs higher than a fixed rate, but means you can overpay it as much as you want). However, this is just me guessing as UB are very sparse on info on their site. I'd be very appreciative of any details of what they say to you., such as if it's a quick process and drawdown like Monbretia says it used to be. Let's just say my experience with form filling with UB the first time around was somewhat gruelling! Do you need to engage a solicitor again?

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Hi nephster.......I have yet to receive a call from them but they said it could take a few days. Will post here when I do get contact and let you know. Although as you say our situations are different some of the info may be beneficial to your own circumstances. Will hopefully know more over the next few days.