You had taken a home loan of Rs 50 lacs five years ago for a term of 15 years. Your current outstanding on the loan is 35 lacs. You want to carry out major renovation in our house and you need a loan to carry out such renovation. You are thinking about a personal loan from a bank. You have got in touch with a few banks to find out the lowest interest rate. One fine day, you bumped into a friend who worked with a bank. You explained him the whole situation and sought his advice. He advised that instead of going for a personal loan, you should explore a top up loan over your home loan. You will get the loan at a much lower interest rate than a personal loan and you can also enjoy certain tax benefits. You got interested and wanted to find out more.
How Does a Top Up Loan Work?
The bank or housing finance company allows you to borrow certain amount over and above your home loan amount. This is subject to certain conditions.
Are There Any Conditions Attached to Top Up Loans?
Yes, there are. Though the exact terms and conditions may vary across banks and HFCs, some of the conditions are as follows:
- You need to have a home loan with the bank/HFC to avail a top up loan.
- Banks offer such loans only after 6-12 months or a few years of satisfactory repayment record on the home loan. A few banks may have an additional condition of completion/possession of the house before such a loan is offered.
- Permissible top up loan amount is 70-75% of the present market value of the property less the outstanding home loan amount. So, if value of your property is Rs 50 lacs and the outstanding home loan amount is Rs 25 lacs, you can avail a top up loan of Rs 10-12.5 lacs.
- A few banks may limit the loan amount to the original sanction amount i.e. the sum of top up loan and outstanding home loan shall not exceed the original home loan sanction amount. In such a case, if the original sanction amount is Rs 30 lacs and the outstanding loan is Rs 25 lacs, the maximum top up loan that can be availed is Rs 5 lacs.
- The tenor is limited to the outstanding tenure of the original loan. If 8 years are remaining on your home loan, the tenor of top up loan will not exceed 8 years.
- There will no additional security sought.
Please note the conditions may vary across banks and financial institutions and may in fact be quite different from the ones mentioned above. You must talk to your bank/HFC to get an accurate idea.
What Is the Rate of Interest Charged?
The rate of interest will be 1%-2% higher than the home loan interest rate. Still, the rates will be better than interest rate on personal loans. In addition, banks may charge processing fees on the transaction.
How Can You Use a Top Up Loan?
The banks typically do not monitor usage of such loan proceeds. Therefore, you can use the fund as you wish. You can use funds for home renovation, paying off a personal loan, purchase of a car, vacation, child education etc.
You might to be required to give an undertaking to the bank specifying the exact use of funds to assure bank that the funds will not be used for any illegal or speculative activity.
Let’s consider certain terms and conditions from two financial institutions. State Bank of India (SBI) and Housing Development Finance Corporation (HDFC) Ltd.
| HDFC | State Bank of India | |
| Processing Fees | 0.75% of the loan amount or Rs 2,000 whichever is higher | 0.35% subject to a minimum of Rs 1,500 and a maximum of Rs 10,000 |
| Repayment record | 12 months after final disbursement of home loan and completion/possession of property | 12 months |
| Minimum Amount | Not mentioned | Rs 3 lacs |
| Maximum Amount | Rs 35 lacs. Additional Condition: Total of outstanding home loan and top up loan shall not exceed original sanction amount or 70% of market value of mortgaged property | Rs 5 crores Additional Condition: Total of outstanding home loan and top up loan shall not exceed 75% of market value of mortgaged property |
| Maximum Tenor | 15 years | Outstanding tenor of home loan |
| Interest Rates* | 9.90%-10.40% p.a. | Varies depending on the loan amount. 0.50%-1.25% over the base rate Current base rate: 9.7% p.a. Effective rate:10.2%-10.95% p.a. |
| *Interest rates are linked to base rate (for banks) or retail prime lending rate (for housing finance companies) and hence are subject to change. You can check the exact rates with your bank/HFC. | ||
You can see that the top up home loan rates are much lower than the personal loan, which vary in the range of 12%-18% p.a. Processing fees is also on the lower side. Hence, a top-up loan is clearly a better option than a personal loan.
You Are Not Guaranteed a Top Up Loan
You will not get the loan just because you have availed a home loan from the bank. Banks will factor in your repayment ability and your commitment towards other outstanding loans before extending the facility. However, you can expect the process to be much faster since you have an existing relationship with the bank and an established repayment track record. The final decision, however, rests with the bank/housing finance company.
Tax Benefits
Tax benefits are dependent on the purpose for which the loan is utilized.
You will be eligible for tax benefits under Section 80C (for principal repayment) and under Section 24 (for interest payment) if you use the loan proceeds for purchase or construction of a new residential property.
No tax benefit under Section 80C (for principal repayment) shall be applicable if the proceeds are used for any addition/alteration/renovation/repair of the house, which is carried out after issuance of completion certificate or after property has been occupied or let out. However, in such a case, you will get benefits under Section 24 for interest payment.
Editor’s Note: Top Up loans are not home improvement loans, but part of mortgage loans portfolio and purpose need not be home improvement.
If you use the loan proceeds for any other purpose such as purchase of a car, vacation etc., then you will not get any tax benefits.
Conclusion
The basic principle of debt management applies to top up home loans too. You must not avail the facility unless it is necessary. But yes, in cases of emergency or even in cases where you need to borrow, a top up loan is a better alternative compared to a personal loan.
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