What’s a top up loan!

By bankbazaar | February 29, 2012

A top up loan basically allows you to avail a loan amount on top of your home loan. The usual loan tenure is about 10 years and is often offered only after a few years into the home loan disbursal, as this gives a fair idea about your repayment track record, which means no defaults down the line and this also increases your loan eligibility.


Vinita Mistry took a home loan from her friendly neighborhood bank two years ago. She bought a cute cozy apartment in a block of 60 apartments in a community enclave, which housed 300 apartments in all. At that time she did not have a four-wheeler and rode a trendy power bike to work, which was always parked under the stairway that went up to her 5th-floor apartment. She eventually moved office and upgraded to a gorgeous looking small car. Then she had a problem! Parking Space!!.

She figured she needed to buy that additionally apart from her apartment cost. She wished to take a loan to cover the cost of purchasing a parking slot. How can she go about this? Are you stumped like Vinita wanting more amenities or are you looking for some urgent funds, without expensive interest rates attached to it?  Well, a top up loan on your existing home loan might just be the answer. Let us understand the various nuances of a top up loan before you decide to shortlist this as an option.

How it works

A top up loan basically allows you to avail a loan amount on top of your home loan. The usual loan tenure is about 10 years and is often offered only after a few years into the home loan disbursal, as this gives a fair idea about your repayment track record, which means no defaults down the line and this also increases your loan eligibility.

The logic behind a top-up loan is the fact that you have already started repaying your loan, hence your outstanding loan amount with the bank has already begun decreasing with each payment. A top up just enables you to utilize that margin towards obtaining a loan that you may urgently require to meet some of your needs.

Utilizing a top up loan

Top up loans are a boon to people who are in urgent need of funds. It is almost like a personal loan, except that it comes with better interest rates though not as good as home loan rates but are based on the prevailing rack rates. You can utilize this loan for any purpose. A top loan on your existing home loan is an ideal choice to pay for your parking space or to fund your son’s higher education for instance.

Eligibility

You can take a top up only when you have a home loan to top up on. The conditions for top up loans vary from bank to bank. You can approach the same bank in which you took your home loan but if your bank does not offer you the option, as some reserve the right to provide a top up, then you could shift the home loan to a bank that is willing to give you a good deal on the top up loan. Keep in mind that you need to have an impeccable repayment track record.

The outstanding loan amount pending with the bank, the market value of the property and your ability to repay a top up, are all taken into account to figure out how much top up the bank gives you. In fact the upper limit on the loan amount is defined based on these three aspects.  It is always ensured that the outstanding loan amount you owe the bank plus the top up personal loan does not increase beyond around 70% of the market value of the property. Also, each bank will have its own upper limit and the loan amount will be restricted accordingly.

Tax benefits

Tax benefits are dependent on the purpose for which the loan is utilized. For Vinita, the loan is for parking space, which is part of property acquisition. Hence, she would be eligible for a tax rebate on both the principal and tax repaid towards the top up loan capped at Rs. 1 L and Rs. 1.5 L respectively, which is inclusive of the rebate she would avail from her current home loan.

A sample calculation for Vinita’s top up loan

Let us assume Vinita has taken a loan of Rs.30 L at a 12% interest rate for a period of 20 years and as specified is now in her third year into the loan.

Let us make another assumption that from the time she purchased the property, the value has risen by Rs. 20 L, which pegs the current market value of the property at Rs.50 L.

70% of Rs. 50 L = Rs. 35 L (70% of the value is taken as the margin beyond which the loan will not exceed)

Next, the outstanding loan amount is deducted from the above figure:

Three years into the loan she would have repaid a principal amount of Rs.1.31 L

Remaining Principal amount to be repaid – Rs. 28.7 L

Rs. 35 L ( 70% of market value) – Rs. 28.7 L (principal yet to be repaid) = Rs. 6.3 L

Hence the maximum top up loan she will be eligible for based on this example, is Rs. 6.3 L.

However to avail a top up loan, factors like your repayment capacity based on your income and commitment towards any other loans other than your home loan etc., will be factored in before the bank decides on the exact top up loan amount they can offer you.

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21 thoughts on “What’s a top up loan!

  1. Dr. R.Gopinath

    This is a very interesting piece of information. Thank you. I have a query. Since you said the loan can be used for various purposes I wish to konw if I can use the same for buying a piece of land as an investment and if there would be a tax benefit for the same and if so under what section and to what extent. Is there a cap to the amount of loan that can be sought or should it be the same as the original loan as the value of the property against which loan was originally taken has now become almost a 1000 times since the loan was taken 15 years ago. I have an existing loan with the HDFC on a floating rate basis.
    In anticipation.

    Dr.R.Gopinath

    Reply
  2. Kishore

    I have taken top loan from LICHFL of Rs. 4 lacs on my flat. Can I claim tax rebate on interest amount .
    Kishore

    Reply
    1. Team BankBazaarTeam BankBazaar

      Hi Bansilal Patil,

      Thanks for writing to us. You will need to get in touch with your existing Home Loan lender to see if you are eligible for a top-up loan.

      Reply
    1. Team BankBazaarTeam BankBazaar

      Dear Deepak,

      Thanks for your valuable feedback. Please keep reading our blog.

      Cheers,
      Team BankBazaar

      Reply
  3. Venky

    Can we close a home loan and continue the top up loan alone? Another question, what if we want to sell a property on which home loan and top up loan is currently running?

    Reply
    1. Team BankBazaarTeam BankBazaar

      Hi Venky,

      It is possible to continue your top-up loan even after closing your Home Loan. If you are planning to sell a property, you can ask the buyer to close the loan after which you can transfer the house into their name.

      Cheers,
      Team BankBazaar

      Reply
  4. Vivek

    I have taken top loan from LICHFL of Rs. 4o lacs on my flat. Can I claim tax rebate on interest amount .
    Regards,
    Vivek

    Reply
    1. Team BankBazaarTeam BankBazaar

      Hi Vivek,

      You can claim a tax deduction for the interest portion of your Top-up Home Loan.

      Cheers,
      Team BankBazaar

      Reply
  5. SUPRAKASH MITTRA

    “Tax benefits are dependent on the purpose for which the loan is utilized”. Now if I take a Top Up Loan offered by my home loan Financier for financing the higher education of my child and necessarily keep all the records in respect of the purpose for which this top up loan is utilised, why shouldn’t I avail the tax benefit u/s 80E?
    Sec 80E nowhere attached any condition about the source of the loan Except for : it has to be taken from an FI or a Bank. PLEASE HELP WITH YOUR ADVICE.

    Reply
    1. Team BankBazaarTeam BankBazaar

      Hi Suprakash,

      We suggest that you contact your chartered accountant to find out whether it is possible to avail of tax benefits under Section 80E in this scenario.

      Cheers,
      Team BankBazaar

      Reply
  6. KN Rao

    I heard that no bank should charge any amount towards foreclosure of a home loan. Is that also applicable to a top up loan on home loan?

    Reply
    1. Team BankBazaarTeam BankBazaar

      Hi KN Rao, Yes, you heard right. There won’t be any charges on foreclosure of a Home Loan even if there has been a top up to the loan. For more information on Home Loans, do check out our blog, and download our App. Cheers, Team BankBazaar

      Reply
  7. Sachin

    Hi,

    Is it possible to use SBI Top UP loan to close Auto Car Loan and Personal Loans?

    Thanks,
    SK

    Reply
    1. Team BankBazaarTeam BankBazaar

      Hi Sachin,

      You could do that. But if the interest on the top up loan is lower than the auto Car Loan and Personal Loan it will make sense to use it. If not, please avoid taking more loans.

      Cheers,
      Team BankBazaar

      Reply
      1. Deepakgiri Aparnathi

        Do we have any Tax benifit, If we have used SBI Top Up loan to pay Auto car loan ?

        Regards,
        Deepak Aparnathi

        Reply
        1. Team BankBazaarTeam BankBazaar

          Hi Deepakgiri Aparnathi,

          There are no tax benefits for Car Loans unless you got the loan in the name of your business.

          Cheers,
          Team BankBazaar

          Reply
  8. P.raghavendhar

    Good evening sir,i had taken 16 lakhs home loan ,on 7/7/2016. My net salary is 33500 and gross is 38000.now i want to take top up loan on sbi. Now i am eligible or not to take top up loan.hom much will i get amount .i am govt employee.so please convey me.

    Reply
    1. Team BankBazaarTeam BankBazaar

      Hi P.raghavendhar,

      The logic behind a top-up loan is the fact that you have already started repaying your loan, hence your outstanding loan amount with the bank has already begun decreasing with each payment. A top up just enables you to utilise that margin towards obtaining a loan that you may urgently require to meet some of your needs. Depending upon how much you have repaid on your loan, you will be able to avail a top up loan.

      Cheers,
      Team BankBazaar

      Reply

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