Arjun Ray, an IT professional, had taken a home loan almost 5 years ago and now is comfortably servicing his home loan. Recently he decided to renovate his house, with either a gold loan or a personal loan. However, his financial advisor also told him about a home loan top-up. Now, which is the right option for someone like him?
Home loan top-ups are an additional loan granted over and above a borrower’s existing home loan. To finance your need for additional funds, existing home loan borrowers can avail a top-up loan. These funds can be used for various personal needs, from home renovation to child s higher education, including business-related needs, and financing business operations.
Also, if your current lender rejects your request for loan top-up, you may opt for a home loan balance transfer with a new lender. Borrowers can avail the top-up loan facility if they have a consistent repayment record, and have paid their EMIs on time pre-determined by banks.
However, before zeroing down on a type of choice, evaluate other available loan options before settling for any specific product.
Top-up Home loan against other loans
Loan amount: The top-up loan amount normally depends upon the Loan to Value (LTV) ratio, which is set by the lender. Generally, the Loan to Value ratio offered doesn t go beyond 75 per cent of the current market value of the property. In case of other loan option, the maximum loan amount can be higher than that of a top-up loan. For instance, the personal loan goes up to Rs. 40 lakhs and gold loan Rs. 10 crores.
Processing time: Loan options such as personal loan, loan against credit card and gold loan outscore top-up loans when it comes to the processing time of a loan. Especially, instant credit card options- Credit card loans and gold loans – are disbursed within a few minutes or within a day. With personal loans, disbursement is made within 1-2 days. Processing and disbursal of top-up loans generally take a week, since based on the evaluation of the property, the loan amount is finalized.
Loan tenure: The tenure of top-up loans generally depends on the borrower’s remaining home loan tenure. While deciding upon the loan tenure, other factors such as the borrower’s credit profile and existing debts are also taken into consideration. The loan tenure in case of top-up loans goes up to as long as 20 years. Such longer repayment tenure comes handy if you are getting a higher loan amount. The loan tenure when compared to other loan options clearly outscore, for instance, the personal loan comes with a maximum of 5 years whereas gold loan comes with up to 3 years.
Interest rate: The interest rates of top-up loans are generally 0.5-1 per cent higher than home loan interest rates. Home loan interest rate starts from as low as 8.35 per cent per annum. When compared with other loan options, top-up loan rates still are comparatively lower. For instance, gold loans range between 9.24 per cent and 26 per cent, whereas personal loan interest rates usually range between 10.65 per cent and 24 per cent. For the existing home loan borrowers, the low-interest rates of top-up loans make it the cheapest source of funds. Also, top-up loans can also be used for paying off other loans that come with higher interest rates.
Tax benefits: Under the Income-Tax Act, the interest and principal repaid on gold loan, personal loans, or loan against credit card do not qualify for any tax benefits. In the case of top-up loans, however, tax benefits can be availed for both principal payments as well as the interest paid depending on the usage of the funds. If the funds are used for home renovation, home repair, or alteration of the property, then the interest paid qualifies for deductions under Section 24B. If the loan proceeds are used for construction or purchase of new property, the principal and interest repaid are also eligible for tax benefits under Section 80C and 24b respectively.