Are you planning to renovate your house, or make some changes, while paying for your home loan? Instead of opting for a gold loan or a personal loan, you can also opt for a top-up home loan. These loans are additional loans given to borrower’s over and above their existing home loan. These loans are given to existing home loan borrowers, to finance their need for additional funds.
However, the usage of this fund is not limited to renovating or making changes in your house. You can use this money to fund other personal expenses such as child’s higher education, business-related needs, or financing business operations. Generally, borrowers are approved for a top-up loan facility if they have, paid their EMIs on time, and have maintained a consistent repayment record.
Hence, while zeroing down on your choices, evaluate your options based on these criteria;
The interest rate for home loan ranges between 8.05 per cent to 10.50 per annum. However, the interest rates of top-up loans are normally higher by 0.5 to 1 per cent than home loan interest rates. Gold loans, on the other hand, offers interest rate ranging between 9.24 to 26 per cent, and personal loan charges interest rates ranging between 10.65 to 24 per cent, which are comparatively much higher than top-up loan options. With such low-interest rates, top-up loans are one of the cheapest sources of funds for the existing home loan borrowers.
To approve you for a top-up loan, the lender sets the loan amount depending upon the Loan to Value (LTV) ratio. Usually, the LTV ratio offered by lenders does not go beyond 75 per cent of the current market value of the property. For higher loan amount, you can opt for other options such as personal loan or gold that goes up to Rs 40 lakhs and Rs 10 crores, respectively.
The loan tenure depends on the borrower’s credit profile along with his/her existing debts and the remaining home loan tenure. Generally, the loan tenure goes up to 20 years, in the case of top-up loans. Experts suggest one should go for such longer tenure only if you are getting a higher loan amount. Note that, for longer tenure options top-up home loan is the best option as personal and gold loan comes with a maximum of 5 years and 3 years, respectively.
Loan disbursement and processing time vary depending on the type of loan and for top-up loans, disbursement generally takes a week, after evaluation of the property. For instance, credit card loans and gold loans, generally have very less processing time. Both this type of loan disburse their fund within a few minutes or a day. Personal loans make disbursement of their loan amount within a day or two.
You can avail tax benefit for the interest paid, in the case of top-up loans. The interest paid on top-up loan qualifies for deductions up to a maximum of Rs 30,000 per financial year. However, under the Income-Tax Act, the interest and principal amount on both personal loan, gold loan, and loan against credit card do not qualify for any tax benefits. Note that, you will be eligible for deduction only if the top-up loan was taken for renovation or repairs of house property. In case the loan is used for education, children’s marriage, etc. no deduction will be allowed.