By BankBazaar.com
Your existing home loan provider can be your best friend in times of your future financial needs. As they offered you a mortgage against your house, they can also help you with a quick loan against your house called a ‘top-up loan’ where you don’t have to provide any additional collateral or paper work.
Top up Loan Concept
When Vishal Menon, Senior Manager of Reliance Communications, decided to buy a car, he wanted a car loan. He found that the loan started from 12% interest rate and so he turned to his home loan provider for a top up loan. He had about nine years left in his home loan. The bank offered him a top-up loan of Rs 4 L at a floating rate of 9.5%. Thus he was able to cut down an interest rate of 2.5%.
Once you prove your bank that you can repay the home loan, you can ask them to get it topped up. It can be used as a personal loan to finance anything from your interior decoration or child's education to daughter’s marriage. The top-up is treated as a second loan and is charged a slightly higher interest than the existing home loan (usually 1-1.5%), and you need to pay a separate processing fee (same as that of the home loan).
The tenure of a top up loan can be as long as the outstanding tenure of the home loan. This will help you to reduce your overall cash outflow.
Who can borrow and how much?
Banks and housing finance companies extend top-up loans to existing borrowers, if he has completed at least 6 repayments. It is considered as an extension of your existing home loan, but they are not particular about how you spend that money.
What they look for is whether you have been prompt in repaying the EMIs of the existing home loan. If there are backlogs in the repayment track, then the lender may not be willing to offer you a top-up.
Another factor that determines the amount of top-up is the existing market value of your property. The more the property value has gone up, the more you can avail as a top up. The current repayment capacity of the applicant and the amount of loan that is already repaid will also be considered. This is done to ensure that you are capable of servicing the top-up loan.
Apart from these, the bank’s lending policy also determines the amount you get as a top-up. Some banks have a cap on top ups based on the original loan taken, while some others extend loans on current market values, outstanding balances and repayment capacity.
For instance, an HDFC bank customer can avail a top-up loan subject to a maximum 70% LTV, considering the repayment capacity of the borrower as per their policy. For instance your outstanding loan is Rs 5 lakh and the current market value of your property is Rs 10 lakh. In this case, HDFC will offer you a top-up of Rs 2 lakh, if you are eligible for a loan of Rs.7 lakhs as per your income statements.
ICICI Bank, on the other hand, has a cap of 20% of the original amount borrowed. That means, if your have availed a loan of Rs 10 lakh, you will be eligible for a top-up of Rs 2 lakh, regardless of the value of the property or outstanding balance in your loan account.
The Other Side
The top-up loans are treated as separate loans, and are not eligible for any tax rebates. Housing loan tax rebates can be enjoyed only for the first loan.
A top-up loan is best when you have a longer-term financial requirement, and not in times of urgent short-term funding which you can tide over by borrowing from friends, or by taking a gold loan. If you need a short-term infusion of cash, an overdraft facility with your bank will also make more sense. However, if in times of an inevitable big ticket expense, top-up loans give you the best combination of a flexible tenure and a lower interest rate.
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