Taking a home loan is the best possible way to buy your dream home. But home loans alone may not meet all your financial needs. In fact, if you are looking for funds to renovate your house or meet your personal or even business expenses, a top-up loan on your existing home loan may prove to be a cost-effective solution.
What are top-up loans?
If you have taken a home loan and have made timely repayments, then your bank may give you the option of borrowing an additional loan equal to the amount of your current housing loan that you have paid thus far. A top-up loan, thus, is a loan offered to you over and above your home loan.
“Top-up loans offer you the advantage to ride any financial crunch you may face while renovating or repairing your home. You are also free to use the funds for any other needs, as they come with no preconditions,” says Adhil Shetty, founder & CEO of BankBazaar.com.
Top-up loans can be availed only by existing home loan borrowers. There are other preconditions too that you need to fulfill before you become eligible for such a loan.
Minimum period: A top-up loan is available only after you have started repayment of your home loan for a minimum period, depending on your bank. Usually, banks have a minimum repayment period of 2-3 years before they consider you for a top-up loan.
Good repayment track record: You need to have a good repayment track record and a healthy credit score to be eligible for a top-up loan. If your home loan repayments have been delayed or are erratic, or if your credit score is low, then your chances of getting a top-up home loan will reduce substantially.
LTV limits: You are allowed to borrow only a certain percentage of your home loan as a top-up loan. For home loans, the LTV (Loan-to-Value) ratio is fixed at 80-85% of the present value of your property. “So if you have availed 85% of your property value as a home loan, you will be eligible for a top-up loan only when your property value appreciates, so that the outstanding loan amount, including the top-up loan, does not exceed 85% of the property value,” says Shetty.
Tenure: The tenure of top-up loan runs concurrently with that of your home loan. So if you have 10 years remaining for your home loan repayment, your top-up loan tenure cannot exceed the remaining term.
No additional mortgage: A top-up is offered on your existing home loan, hence there is no need to furnish any additional security or mortgage.
No precondition on usage of funds: You can use the money from a top-up loan as per your needs. So feel free to use it for personal or business needs, or towards home repair and renovation.
Quick processing with low interest rates compared to personal loans: Since top-up loans are offered only if you have taken a home loan too, and as banks already have done a thorough background check, this speeds up the loan processing time. Also, the interest rates on top-up loans are far lower as compared to those on personal loans, making them more pocket-friendly. Interest rates on top-up loans, however, usually tend to be 1.5 to 2.5% higher than those on home loans provided by the bank or a housing finance company. Still, top-up loans are a far cheaper option than personal and many other loans and also offer the advantage of a longer tenure, which helps reduce the EMIs substantially.
As is evident from the table, while top-up loans are currently available in the 9.45-12% per annum range, banks and FIs charge 11.49-25% p.a. on personal loans and 9.60-24% p.a. on gold loans. Even the processing fees are lower in case of top-up loans as compared to those on most other loans, which makes top-up loans a cheaper option.
When to and when not to take a top-up loan
A top-up loan can be taken when you, as an existing home loan customer, have other financial requirements. “The amount taken as a top-up loan can be used for raising business capital or for big-ticket expenses such as wedding expenses, children’s education or marriage, house maintenance, among others. However, as the processing time of a top-up loan may take several days, it will not be as easy as taking a gold loan, especially in situations like medical emergencies,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.
How to opt for a top-up loan
You can request your bank to consider offering you a top-up loan when your home loan fulfills the minimum tenure to be eligible for a top-up loan. You can also get a top-up loan from another bank which offers home loans at lower interest rates and therefore you’re planning to shift to that bank.
A top-up loan is, therefore, a good way to raise funds. With low interest rates and the freedom to use the money as per your requirement, it is, indeed, like a sweet cherry on the top of your home loan cake.
Credits ET Realty