The top loan has a higher interest rate than the mortgage, which is the loan you take out on up to 70% of the value of the home.
The top loan is what some banks call the part of the mortgage that is between 70% of the value of the home and 85% of the value. The top loan has a higher interest rate than the mortgage, which is the loan you take out on up to 70% of the value of the home. It is called a top loan because it simply applies to the last part of the mortgage and it will slowly disappear as you pay off your mortgage. When you have repaid so much on your mortgage that you own at least 30% of it, the top loan has disappeared completely and you will in future only pay on the bottom loan.
Why is the higher interest rate on the top loan?
One of the reasons why some banks divide the mortgage into a top loan and a bottom loan is that there is always a risk that the home will lose a few percent in value. If the loan-to-value ratio is high, the house no longer serves as security for the loan to 100%. In the worst case, it may mean that you can not pay your entire debt for the mortgage if you end up in financial distress and are forced to sell the home. The bank therefore considers itself to take a greater risk when you borrow for a larger part of the value of the home. For the increased risk, they charge extra. If you can buy a home without having to take out a top loan by having a lower loan-to-value ratio, you will save a lot of money in the long run.
Top loans were more common in the past
Previously, you could borrow at the value of the entire home and did not need to have a cash contribution. At that time, top loans were standard and all mortgages were divided into two parts. Now that there is a requirement for a cash investment, the top loan has played a bit of its role and far from all banks have top loans today. You then pay the same interest on the entire loan. This with top loans is therefore not always something that you even need to think about, just because you intend to apply for a mortgage. Many who took out mortgages before 2016, however, remain with their top loans and will do so for many years to come. If they do not choose to repay their loan so that the top loan disappears.
The mortgage ceiling fulfills the same function as the top loan
It can be said that the top loan worked a bit like a brake that prevented US households from borrowing too much and instead saving up for a cash investment. Today, instead, we have the mortgage ceiling, which has a much greater braking effect than what the top loan had.
Can you borrow for the cash deposit?
In the US, you currently need a cash contribution of 15% of the mortgage to be granted a mortgage. The top loan thus does not cover the last 15 percent of the loan. What you can possibly do if you need a mortgage but lack savings is to apply for a private loan that you use instead of a cash deposit. However, be aware that the interest rate on a private loan is even higher than for the top loan and that it is good for most people to have saved up to 15% of the value of the home.