Are you constructing your house with a home loan? Have you exceeded your budget and spent all the money from your home loan? Or do you need extra cash for interior decor?
No need to worry! Banks and other lenders offer top-up loans for such needs. However, you will be eligible only if you are an existing home loan borrower.
Read today’s Brick & Bolt blog to learn more about top-up home loans, home loan top-up benefits, and how to get a top-up loan.
What is a Top-Up Loan on a Home Loan?
You can understand a top-up loan as a way to get additional funds over and above your home loan. You must be an existing home loan borrower to get a top-up loan. The tenure of the top-up home loan is similar to the tenure of your housing loan. It won’t need any additional security or guarantee. The interest rates can be similar to or slightly higher than home loans. Also, the tax benefits can be claimed on your home loan top-up. Some banks fix conditions to use the top-up loan exclusively for home-related purposes, while others can allow you to use it for varied needs.
Benefits of a Top-Up Loan on Home Loan
You can get the following benefits by taking a top-up loan on a home construction loan:
Similar Interest Rates
When you borrow additional money as a top-up loan, you do not have to pay higher interest rates to complete your house construction. The interest rate can remain the same as the interest rate for a home loan or 2-3% lower than the rates on unsecured personal loans. For a detailed understanding of how to calculate EMI for your housing loan, check out our comprehensive guide. It helps you to save a considerable amount of money.
No Collateral Required
Lenders keep your home under construction as collateral to provide top-up loans; thus, you don’t have to keep any other property as new security. This helps you to get the additional amount easily.
Flexible Repayment Tenure
Top-up home loans give flexible loan tenure options. Here, you can choose a suitable tenure. This will help you to manage your monthly payments effectively and avoid the financial strain of managing EMIs.
Minimal Documentation
As you already submitted essential documents during the house loan, you don’t have to submit more than when applying for a fresh loan. Hence, you can achieve faster loan processing and quick allotment of funds.
Tax Benefits (Under Section 24 & 80C)
You can get tax benefits for top-up loans under Section 24(b) of the Income Tax Act. You can claim a tax deduction on the interest paid on the loan, provided that the funds are utilised for home improvements or related expenses. Under Section 24(b), up to ₹2 lakh can be claimed as a deduction for interest paid, while Section 80C allows for deductions on principal repayments.
Top-Up Loan Eligibility Criteria
When you want to apply for a top-up loan on existing home loans, you need to check your eligibility criteria. The following are the top-up loan eligibility requirements you need to fulfil:
Good Repayment History: You must have a clear repayment history. You should not have any defaults on your existing home loans.
Loan-to-Value (LTV) Ratio: Most lenders in India set the LTV ratio between 75-85% of the property’s current market value. It means you can get the top-up loan amount based on a percentage of your home’s worth.
Stable Income & Credit Score
You must have a stable income and a credit score of 750 or higher. Most lenders set the credit score limit of 750 as minimal, as it indicates a lower risk for lenders, improving the chances of loan approval.
Property Valuation: Lenders assess the current market price of your house property to ensure it supports the requested loan amount. After the valuation, you can proceed to get the top-up loan.
Documents Required for Home Loan Top-Up
When applying for a home loan top-up, you need to provide the following essential documents:
Know Your Customer (KYC) Documents: These generally include ID proofs, such as the Aadhaar card, PAN card, and passport, to confirm your identity and residency status.
Proof of Income: If you are a salaried person, you must submit salary slips and recent bank statements. Self-employed individuals must provide their income tax returns (ITR) and financial statements.
Existing Home Loan Details: Provide details regarding the existing home loan, especially the repayment track record.
Recent Property Papers: As lenders need to evaluate the latest valuation reports to assign the fund, you must submit this.
How to Apply for Top-Up Loans?
The procedure can be online or offline based on the bank from which you take the home loan. However, to apply for a top-up loan, you need to follow the general guidelines:
Step 1: Check Eligibility
Check your eligibility for a top-up loan.
Step 2: Submit Application & Documents
Submitting the top-up loan application along with the requisite documents either online or offline, depending on your lender’s facilities.
Step 3: Property Valuation
After submission, the lender will conduct a property valuation to evaluate the current market value. This step will help to determine the loan amount you qualify for based on the Loan-to-Value (LTV) ratio.
Step 4: Loan Approval & Disbursement
Once the lender reviews and approves your application, they will send the loan amount to your bank account. This usually takes 3 to 7 days, helping you get the extra money you need quickly.
Things to Consider Before Taking a Top-Up Loan
Before choosing a top-up loan, you need to consider the following factors to save yourself from unwanted risks:
- Check processing fees and prepayment charges. This advanced idea will help you avoid surprises during the loan application process. Some lenders may charge up to 2% on prepayment, which can affect your financial flexibility.
- Consider the repayment loan tenure options. Wisely choose based on your financial goals. Typically, it will be capped at 10 years or the remaining tenure of the existing home loan, whichever is shorter. Some banks may raise the tenure to 20 years, but within the limits of the home loan.
- Not all banks will allow you to spend the top-up loan amount for purposes other than house improvements. Wisely choose the option based on your purpose. Don’t waste the money on other activities. Always adhere to legal and ethical usage.
Potential Drawbacks of Top-Up Loan
While top-up loans offer numerous benefits, they’re not without potential drawbacks:
- Increased debt burden
- Risk of losing property in case of default
- Possible impact on credit score
- Additional processing fees
Top-up loans give additional chances to improve and customise your house construction along with composite construction loans. Make sure to understand eligibility criteria, benefits and potential risks before deciding. Top-up loans can be very helpful, but it’s important to think carefully before taking one. Make sure you understand how it fits into your long-term financial plans.
If you want to calculate your home loan EMI to understand your repayment capabilities, we recommend using our online EMI calculator.
Hemali Patel