Ah, the mortgage top-up or equity release. The cause of and solution to all of life's problems.

We've already discussed the joys of owning equity in your home, i.e. having a house that's worth more than the outstanding mortgage.

We also talked about the Loan To Value ratio which is really just a different way of saying the same thing. If you own 20% equity in a property then you have 80% Loan To Value.

A Top-up mortgage is simply a way of borrowing more money against the property. The end result of course is that your equity gets diminished, or to put it another way, your Loan To Value increases.

Take the example of a home worth €300K with a €240K mortgage. There's €60K of equity there (20%).

If we go to the bank and ask them for a €40K top up, our equity falls to 20K (a little under 7%).

Why would anyone want to do that?
In simple terms, equity release makes you feel rich. You have all this extra cash, and the repayments are spread over 30 years. Maybe you hardly even notice the repayments. It's like free money.

And the best part is, if house prices keep rising, your equity rebuilds itself. In our example above when our house gets up to 350K we'll be back to 20% equity even if we don't pay down a penny of the mortgage.

To be a little more serious there are good reasons and bad reasons for releasing equity, and there are good ways and bad ways of doing it.

Good Reasons
An Extension or Home repairs.
Borrowing money to improve your house can be a very good reason for releasing equity. If the changes add more value to the house than they cost then the extra borrowing and interest can be worthwhile.

Emergency Repairs
Things go wrong from time to time, and sometimes you get stuck with the bill. Ideally you should have a savings account for emergencies, but if you end up needing to borrow, a mortgage top up is likely to be cheaper than most other kinds of loans.

Illness, Injury etc
Along the same lines as the Emergency repairs, if you have unexpected medical bills or perhaps a short term loss of income and if borrowing is the last resort to see you through then it's better to use the equity in your home rather than using costly unsecured credit like credit cards.

Debt Consolidation
This is a controversial one. If you do have debts such as credit cards, car loans, personal loans etc, then you can save yourself a lot of money by consolidating them into a single amount that you borrow against your house. The difference in the rate of interest you'll pay on a mortgage as compared with a credit card is huge.

This reason for equity release is controversial because there's considerable evidence that people who get an easy fix like this to their debt problems are prone to repeating the same mistakes, running up the debts again, and ultimately ending up worse off.

If you use debt consolidation you have to treat it for what it is. A lowering of the interest rate so that you can clear the debt more quickly. It is NOT an improvement in cashflow that allows you to start spending again.

Bad Reasons
Holidays, TVs, Cars and other cool stuff.
A holiday lasts for a week or two, but stick the cost of it on
your mortgage and it might take decades to pay for.

In general it doesn't make sense to borrow for things that don't last as long as the debt. It also doesn't make sense to borrow for things that decline rapidly in value, such as TV's or Cars.

Yes, the reality for most people is that they use Car Loans to get cars, and yes if you're borrowing in any case the mortgage is likely to have the best interest rate, but your first step should be to try and avoid borrowing at all.

The pros and cons of debt are for another time, suffice to say that you should try to avoid using your mortgage as an ATM to feed your consumer desires. That way lies trouble.

Gift to Child for House Deposit
Another controversial one here. During the bubble parents say the value of their homes skyrocket. They had more equity than they knew what to do with.

They saw their children struggle to afford houses, thwarted by the same house price increases from which they were benefiting.

Putting 1 and 1 together, they parents say a simple logical solution. Release equity from their house price increase and give it to their children, so that they can "get on the ladder" and start benefiting from the house price rises.

The reason I put this down as a bad idea rather than a good is that it actually did help in the main. It turned the property market into a kind of pyramid scheme where the profits being made at the top were reinvested at the bottom.

It also gave young couples an artificial sense of their own wealth, and encouraged them to buy bigger houses, and borrow more than they would have managed on their own.

Buying a house shouldn't be easy, it has always been hard, but it should be possible, and it should be possible to do it without handouts.

It's hard to watch your kids struggle to afford a home when all around them their peers are snapping up houses, many with their parents money.

In the long run people are better off and better able to cope if they have to stand on their own two feet.

Keep the equity in your house, or blow it on the grandkids.

A wrong way and a right way
If you have 2 years left to run on your mortgage, then it might seem sensible that if you get a topup you should simply add it to the balance of the mortgage and pay it over the same 25 years.

Don't do this.

If you can at all then spread it over as short a term as possible. If you bought a card then spread the topup repayments over 4 or 5 years, as you would with a car loan.

For a holiday (if you must) then make it no more than 12 months.

The amount of interest you pay is a function of not only the rate both also the length of the mortgage. The more time it takes to clear the topup the more it costs.