I had purchased a property with a home loan sometime back. Currently I need some additional funds for additional expenses on the property. I have decided to take a top up home loan on my existing home loan. Top up home loans clearly outscore other loan options because they come with lower rates of interest rate, higher tenures, and tax benefits.
Generally, top-up home loans are given for home renovation or extension of home and for personal needs such as financing marriage, medical expenses or paying education fees etc.
Existing customers are eligible for top up home loans depending on their property’s market value, repayment track record and a healthy credit score. Some lenders provide top up loans only against completed residential properties, and not against under-construction ones.
Home loans offer tax benefits on repayment of both interest and the principal amount & it holds partially true for top up home loans also. For top up loans, interest portion repaid is eligible for tax deduction u/s 24b, only if the top up loan has been used for acquisition, construction, repair or renovation of residential property. One thing to keep in mind is that the total amount that can be claimed as deduction in a particular year is inclusive of the tax deduction claimed on existing home loan. For example the maximum amount that can be claimed for tax deduction is Rs.2 lakh pa for interest repayment, is inclusive of the interest on both the original home loan and the top-up home loan.
Top-up home loans clearly outscore other loan options such as personal loans, gold loans and loans against property. They come with a lower rate of interest rate, higher tenure, and tax benefits. For top up home loans financial institution charges interest rates 0.5-1% higher than home loans. Even then interest rate on top up home loans is lower than on other loan products. Also, top up loans provide longer loan tenures of up to 20 years.
One of the major disadvantage of top up home loan is the loan amount is limited by the loan-to-value (LTV) of your existing mortgaged property. So, if an individual needs a bigger loan, he has to go for a loan against property at a slightly higher interest rate than that on a top-up loan. Also some financial institutions have fixed a cap on the amount that one can avail through a top up home loan.
Banks or housing finance companies use the documents submitted to them earlier for the approval process, so there is no need to go through the documentation process again. Even then processing time of a top-up loan is higher than a personal loan or a gold loan.
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 10 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’