Design Credits: Vishnu Madhav
Everybody needs a home of their own where they can play video games in their boxer shorts or sing loudly in the shower. So, let’s assume you took the plunge to get your home and took a Home Loan of Rs. 35 Lakh two summers ago. You’ve started repaying the loan EMIs but you have a sudden financial emergency and you’re going to be strapped for funds for the next few months. What do you do now?
- Take a Personal Loan?
- Take a Top-up Loan on your Home Loan?
Mmmm… ? A Personal Loan, right? Because I can do what I want with it, no questions asked, and there’s no collateral required.
If this is your answer, well, this might be good reasoning, but there is one shortcoming. The interest rate! A Personal Loan might seem like the easy way out when you’re short on funds but if you compare it to a Top-up Loan, you’ll find that the interest rate is much higher for a Personal Loan. The average rate of interest on a Home Loan is normally about 3-4 percentage points less than that of a Personal Loan and the interest rate on a Top-up Loan 1-2 percentage points more than that of a Home Loan. The figures speak for themselves. A Top-up Loan will definitely burn a smaller hole in your pocket than a Personal Loan.
Here’s the best part; just like a Personal Loan, you do not have to explain to the bank why you are taking the Top-up Loan. Banks will not ask you the reason for it and will not monitor how you use the funds. You can use it for any purpose and benefit from a better rate of interest too.
Are you serious? Tell me more!
Before you decide to take a Personal Loan to repay your Home Loan, speak to your bank about a Top-up Loan. This loan is cheaper than a Personal Loan and it makes you eligible for tax benefits as well. But applying for a Top-up Loan does not necessarily mean you will receive it. Banks will consider your repayment ability, among other things, before sanctioning a Top-up Loan.
Keep in mind the following two conditions before applying for a Top-up Loan:
- You have to get the Top-up Loan from the same bank which sanctioned your Home Loan.
- Banks offer Top-up Loans 6-12 months after disbursing the Home Loan and only if you have made your EMI payments on time.
These two basic terms are considered by all banks before disbursing Top-up Loans. But there maybe be additional factors considered by banks to determine your eligibility for one.
How much Top-up Loan can I get?
You can get a Top-up Loan for an amount to the equivalent of 70%-75% percent of the market value of your property, minus the Home Loan amount outstanding. To explain this with an example:
The market value of your property at the time of the Top-up Loan application is Rs. 40 Lakh. 75% of your house value is Rs. 30 Lakh. You have an outstanding balance of Rs. 25 Lakh on your Home Loan. This will qualify you for a Top-up Loan amount of Rs. 5 Lakh.
Sometimes, banks cap Top-up Loans so that this amount plus the outstanding amount on your Home Loan stays within the original sanctioned amount of your Home Loan. For example, if your Home Loan was sanctioned for Rs. 40 Lakh and your outstanding is Rs. 25 Lakh, the maximum Top-up Loan you can get is Rs. 15 Lakh. This will keep the total loan amount, at any point, within the Rs. 40 Lakh range.
Do I get more time to repay Top-up Loan?
No, you must repay your Top-up Loan within the tenure set for your Home Loan. If you Home Loan tenure is 10 years, you must repay the Top-up Loan within this time period.
Do I have to provide collateral to get a Top-up Loan?
Now this is one of the perks of a Top-up Loan. You do not have to provide collateral to get one.
I am game. Tell me about tax benefits?
If you take a Top-up Loan, you can apply for tax benefits under Section 80C and also under Section 24 of the Income Tax Act if you choose to use the funds to buy or construct another house.
Additional Reading: An overview of Top-up Loans
So, if you are in need of money to repay your Home Loan or to undertake renovations, a Top-up Loan will be a wise choice compared to a Personal Loan. It is easier on the pocket and offers you nearly all the perks of a Personal Loan.