A top-up loan on a home loan can be a real lifesaver when you need additional financing. It enables you to borrow more money than your original home loan. Such circumstances include, but are not limited to, house renovation, emergency medical care, and children’s education.
These loans are available in India, attract lower interest rates compared to personal loans, and offer friendly repayment terms. This article will help us understand why a top-up on home loans can benefit us, especially for those already owning homes.
What is a top-up loan on home loans?
For existing home loan borrowers, a top-up loan on home loan is an extra credit facility, similar to a revolving credit facility. You will be able to secure additional funds using your property as collateral under this type of loan.
Key features include:
- Interest rates — Typically 1%-2% higher than your home loan rate but way lower compared to personal loan rates.
- Tenure —Typically aligned with the remaining term of your home loan, usually extending up to 15 years.
- No end-use constraint — One can use it for anything like renovation work, medical emergencies or even expansion purposes concerning our businesses among others.
Advantages of a top-up on home loan
#1. Lower interest rates
When equated with credit cards and personal loans, a top-up loan facility is cheaper. Most banks charge 8.5% on secured and 11% on unsecured loans.
#2. No need for extra collateral
An individual does not require extra security when applying for a top-up loan. The lender will use collateral from their existing property-backed mortgages.
#3. Flexible usage
This could include the following:
- Improving or repairing one’s home
- Settling highly charged debts
- Sponsored education or rising medical bills
Tax benefits on particular uses of this loan
In case the borrowed cash from the top-up loan on home loan was used towards renovations or constructions done at home, there are certain modes through which one can claim back some of their paid interest rates in the form of taxes. Use a home loan tax benefit calculator to know how much you save on your payments. The benefits you receive include:
#1. Extended repayment period
Thus, this brings down the monthly instalments, helping reduce the overall financial burden.
#2. Higher loan amount
Lenders usually offer top-up loans up to ₹50 lakhs based on your repayment ability and property valuation.
How Do You Get a Top-Up Loan
Getting a top-up loan on home loan in India is very straightforward, especially if you have been a responsible borrower. Below are the steps to take:
#1. Check Eligibility
Make sure you have never missed any payments on previous debts before considering this form of credit product. For most financial institutions, make sure you have paid your home loan EMIs regularly for at least twelve months.
#2. Loan Application
To apply, contact your current bank. They would most likely ask for documents such as a PAN card number and proof of income and property.
#3. Loan Disbursal
After approval, the funds will be disbursed quickly, usually within one week, into the account specified by the borrower.
Reasons Why Top-up Loans Are Better Than Personal Loans
Here are some of the reasons why top-up loans are preferable to other types of unsecured debts like personal loans:
- Lower interest rates — In India, personal loans attract an interest rate of between 11%-18%, while top-up loans are lent at 8.5%-10% interest rates on average. However, bank-based rates may hike to about 13%.
- Longer tenure — The average duration for a personal loan in any bank is less than five years. However, one can top-up her/his mortgage for up to fifteen years without experiencing any difficulty, such as higher EMI amounts, because no stringent rules govern them.
- Higher loan amounts —Non-collateral loans typically have a cap of ₹25 to ₹30 lakhs. However, for larger financial needs, substantial top-up loans are available, offering higher limits.
Top-Up Loan Utilization Tips
- Use the home loan tax benefit calculator to check whether your loan qualifies for tax deductions.
- Go for top-up loans only if interest rates are lower than those of other loan products.
- Repay on time for a healthy credit score – this will help you get better deals in future if needed again.
The Bottom Line
According to the RBI, an amount of around Rs. 7 lakh crore makes up for the total current outstanding home loans in India as of 2022. Top-up loans on home loans are great financial instruments for Indian borrowers since they are cheap, flexible and easily accessible. It is a perfect solution for homeowners who need to renovate their houses, pay school fees for children or clear all other forms of debt.
