A cheaper option

For borrowers with an existing home loan, taking a renovation loan from another bank is difficult.

During the festival season, a lot of people want to repair or renovate their houses. And banks and housing finance companies (HFCs) are quite happy to facilitate this.

Typically, such loans come under the home loan category, though amounts are much smaller. Under this, you can take loans for renovation, alteration and extension of existing house/flat.

However, there needs to be some proper documentation in advance so that the loan process is smooth. For starters, a quotation must be obtained first from a qualified civil contractor/engineer/architect. The same must then be submitted to the bank for approval.

This quotation will be checked by the bank’s own technical department, whose personnel, in some cases, could also visit the house of the prospective borrower to check if such changes are required or needed. On its approval, the loan is disbursed.

These loans are similar to home loans. Individuals over the age of 21 years with a steady source of income are eligible. But this loan amount varies from bank-to-bank. While there is no upper limit to the amount of loan you can get, the actual loan amount is determined on the basis of repayment capacity, taking into account income, age, repayment track record.

Usually, when applying for such a loan, you have to pay the initial 20 to 30 per cent of the project cost. The bank will lend the rest of the projected expenditure. Also, as a rule of thumb, the project cost should not exceed 45 to 50 per cent of the value of the property, if there isn’t any outstanding loan.

Also, if you have a home loan already, approach the same bank because it reduces the documentation further. The bank, in this case, treats such a loan as an additional top-up loan. So depending on the current market value of the residence and the loan amount to be paid back, the bank decides on an amount that can be disbursed. For instance, if the current value of the house is Rs 50 lakh and loan outstanding is Rs 25 lakh, most banks would offer you a home renovation loan to the tune of Rs 10 lakh.

One primary condition for using this loan is that the property should be in the name of the borrower. As a security, the bank may insist on mortgage of the property to be repaired or renovated. In case an individual has an existing housing loan from a particular bank or a housing finance company, he will have to necessarily opt for a renovation loan from that bank or housing finance company.

This is because the original property papers will be with the bank or the housing finance company, which will not transfer them to another bank or housing finance company till the loan repayment is not complete.

The rate of interest charged could be slightly higher by 1-2 per cent, in case it is a top-up loan.

Still, it is a better option than a personal loan. These loans are available for a flexible tenure that ranges from 1-15 years and the repayment is through equated monthly instalments (EMIs). Some banks also give a moratorium period of 6-18 months after the completion of repair or renovation work.

Processing charges applicable on the loan ranges from 0-2 per cent of the loan amount. The prepayment penalty on the loan ranges from 1-2 per cent.

In addition to the usual documents like the salary slip or proof of income, the borrower needs to submit these too:

* Proof of ownership of house

* Estimated expenditure

* Break-up of estimated expenditure certified by an architect or valuer

* New approved building plan

* Valuation certificate

However, one aspect that individuals need to be aware of is tax benefits on this loan are available only on the interest portion. This is unlike tax benefits for home loans, which are available on both, the principal and the interest components. Therefore, you need to evaluate your options well before finalising an alternative.

Apanloan.com