Sumit, an IT professional, has been working for an MNC since the past 10 years. Thanks to his growing income each year, he has been comfortably servicing his home loan since 5 years. Recently, he decided to renovate his house by applying for a personal or gold loan. However, Sumit’s financial advisor recommended him to opt for a home loan top-up instead. Is it the right option for someone like him? Let us discuss.
What is a home loan top-up?
Existing home loan borrowers can finance their need for additional funds by availing a top-up loan. It is an additional loan granted over and above your existing home loan. The funds can be used for various personal or business-related needs, including home renovation, child’s higher education or financing business operations.
If your current lender rejects your request for loan top-up or doesn’t extend such facility, you may consider opting for home loan balance transfer with the new lender. But before transferring the loan, make sure the new lender would provide you the required top-up loan amount.
Who all are eligible for it?
You can avail the top-up loan facility if you have consistent repayment record, and have paid minimum number of instalments (EMIs) pre-determined by banks. Some lenders provide top-up loans only against completed residential properties. Also, lenders may extend top-up loan option to home loan borrowers transferring their existing home loans to them, from other lender.
How home loan top-up fares against other loan
# Loan tenure: The tenure of top-up loans mainly depends on your remaining home loan tenure. Other factors such as customer’s credit profile and existing debt obligations are also taken into consideration while deciding upon the loan tenure. Maximum loan tenure in case of top-up loans can be as long as 20 years.
Longer repayment tenure may come handy in getting a higher loan amount. Also, given the maximum loan tenure of other loan options such as personal loan (5 years) and gold loan (up to 3 years), top-up home loans clearly outscore other options on the basis of longer loan tenure offered.
# Interest rate: Top-up loan interest rates are usually 0.5-1% higher than home loan interest rates which can be as low as 8.35% p.a. Yet, if we compare it with other loan products, the rates of top-up loans may still be comparatively lower. For instance, personal loan interest rates usually range between 10.65% and 24%, whereas those of gold loans may range between 9.24% and 26%.
Such low interest rates make top-up loans the cheapest source of funds for the existing home loan borrowers. Moreover, top-up loans may also be used for debt consolidation by paying off other loans being served at higher interest rates.
Processing time: When it comes to processing time, loan options such as personal loan, loan against credit card and gold loan outscore top-up loans. These are instant credit options, with personal loans being disbursed within 1-2 days, gold and credit card loans being disbursed within a few minutes or maximum within a day. On the contrary, processing and disbursal of top-up loans usually takes a week, since it requires evaluation of the property, based on which the loan amount is finalized as per the set LTV ratio.
Loan amount: Top-up loan amount usually depends upon the Loan to Value (LTV) ratio set by the lender. Generally, the LTV ratio offered doesn’t go beyond 75% of the current market value of the property. Maximum loan amount in case of other loan options such as personal loan (Rs 40 lakh) and gold loan (Rs 10 crore) can be higher than that of top up loan.
Tax benefits: The interest and principal repaid on personal loans, gold loan or loan against credit card do not qualify for any tax benefits under the Income-Tax act. However, in case of top-up loans, tax benefits can be availed for both interest as well principal payment, depending upon the end usage of the funds. When the funds are used for repair, home renovation or alteration of the property, the interest paid qualifies for deductions under Section 24b. And, the principal and interest repaid are eligible for tax benefits under Section 80C and 24b respectively, if the loan proceeds are used for construction or purchase of new property. However, tax deduction on interest paid on education loans, which is otherwise available under Section 80E, aren’t available in case the top-up loan’s funds are used for funding education.
Top-up loan outscore other loan options in terms of lower interest rate, loan tenure, and tax benefits. However, it’s imperative for you to evaluate available loan options before settling for any specific product. Remember that top-up loan can be availed by the existing home loan borrowers only if they have paid the minimum number of installments, as per the lender’s requirement. Also, top-up loan may not be a viable option for those who are in urgent of funds, given that it usually involves longer processing time vis-à-vis personal loan or gold loan.
(By Naveen Kukreja, CEO & Co-founder, Paisabazaar.com)