A disciplined borrower can use multiple financial products available in the market to make their financial journey smoother. A top-up home loan is one of the easiest ways to borrow money without too much documentation and verification. It also offers more flexibility and better features than other borrowing instruments. One of the main eligibility requirements for a top-up home loan is that you need to be an existing home loan borrower.
A top-up home loan has many benefits. Let’s check out how a top-up home loan works and its key benefits.
How Does A Top-Up Loan work?
Adhil Shetty, CEO, BankBazaar.com, says, “A top-up loan is a borrowing instrument extended by banks and financial institutions only to their existing home loan borrowers. The outstanding home loan amount is reduced from the value of the property to estimate the maximum top-up loan amount. The total balance outstanding after the top-up has to be within the same LTV range at which the loan was issued. For instance, if you were approved for 80% of the property value as a loan, then the total outstanding principal including the top-up can be up to 80% only.”
So, an older home loan account can get more top-up home loans compared to a new home loan account. Usually, banks require a minimum regular repayment of around one year for allowing a top-up on the home loan.
A top-up home loan is easily sanctioned, and the borrowers are not required to cite exact reasons for the loan. You can use it for most legal purposes like paying school or college fees, managing marriage expenses, paying vacation expenses, meeting day-to-day expenses, business purposes, etc. A top-up home loan can be a term loan or an overdraft (OD) facility. Term loans have to be repaid in EMIs within the agreed repayment tenure. Usually, the OD facility can be availed for up to 20 years or till the end of the underlying home loan tenure, subject to timely servicing of outstanding interest and regular repayment of the home loan EMIs. So, a top-up loan allows a longer repayment tenure compared to other retail loan products available in the market.
A top-up home loan is one of the most affordable borrowing instruments available in the market that allows funds for personal requirements. The processing charge on a top-up loan is around 0.50%, and the interest varies depending on factors such as the interest rate applicable on the underlying home loan, repayment tenure, etc.
Here’s the table showing the current interest rate applicable on top-up home loan offered by various banks.
Note: Lowest interest rate (Floating rate) on top-up home loan (term loan) is considered in the table. Banks and HFCs are selected randomly. Data includes interest rate range on Home Top-up term loan for both housing and non-housing purpose. Data taken from respective bank’s website as on Aug 22.
Contributed by BankBazaar.com
Flexible Repayment Options
A top-up home loan gives you great flexibility in terms of repayment. Usually, lenders don’t levy any prepayment penalty on the top-up loan. A top-up loan with an OD facility can be useful for people with erratic income. It can also help consolidate smaller or high-interest loans at affordable borrowing costs. If you plan to use the top-up loan for renovation or reconstruction purposes, you can get the tax benefit u/s 80C and Sec 24 subject to the limit prescribed under the home loan.
Some borrowers use the top-up loan to repay the underlying home loan’s EMI. It would be best if you avoided it because borrowing at a higher rate to repay a loan with a lower interest rate can lead to a debt trap. If you have a genuine liquidity crunch, a top-up home loan can be one of the best choices, with a lot of flexibility and attractive repayment options.