Are you wanting to purchase an additional parking lot for your second car or considering home extension or renovation? If you are an existing home loan borrower with consistent repayment record, then you have another option other than personal loan i.e. Top-up Home loan. A Top-up home loans offer the advantage of lower interest rates, longer repayment period and simpler documentation.
A top up home loan is additional loan on top of your existing home loan. It can be taken with the existing bank if available or upon balance transfer to a new facilitating bank.
Minimum requirement is few years of no default repayment record of exiting home loan. Other conditions vary with each bank.
10 - 20 years, usually subject to outstanding/original tenure on home Loan. It varies with each bank/housing financial institution (HFI).
Primary factors that affect the amount of top up loan sanctioned by the bank are:
1. Outstanding loan amount pending with the bank.
2. Market value of the property.
3. Ability to repay a top-up based on your income.
4. Commitment towards any other loans other than your home loan.
Banks usually follow a basic rule that the outstanding loan amount owed to the bank plus top up loan does not increase beyond 70% of the market value of the property.
The rate of interest charged on a top-up home loan is usually 1%-2% higher than the home loan interest rate. Still, the rates will be better than that on personal loans. However, banks may charge processing fees on the transaction. It is advised to always read the loan agreement carefully for all terms regarding additional or hidden charges before taking the loan.
Banks do not monitor usage of such loan proceeds. Therefore, you can use the fund as you wish. However, the bank would require you to give an undertaking specifying the exact use of funds, to assure them that the funds will not be used for any illegal or speculative activity.
Tax benefits under Section 80C (for principal repayment) and under Section 24 (for interest payment) will be available only if you use the loan proceeds for purchase or construction of a new residential property. If you use the loan proceeds for any other purpose such as higher education of child, medical expenses etc., then you will not get any tax benefits.
Like any other debt instrument one must be prudent and always undertake a cost-benefit analysis before availing a top-up home loan. However, in case of an urgent need of fund, a top up loan is a better alternative compared to a personal loan.