Same house, bigger loan

Top-up loans can come in handy to raise a big sum but see the lender's caveats before opting for one

Mostly people tend to forget that their single largest asset, their home, can rescue them when they are in need of large sum of money. If you have an ongoing home loan and need large amount of money, a top-up on the existing loan can help bridge the gap.

Top up is an additional loan that a housing finance company or bank gives to their existing customers. The top up loan can be used to furnish a house, buy a parking lot and/or consumer durables, a new vehicle or to finance child's education, marriage or a family holiday.

The lower rate of interest is what makes this loan product attractive. Lenders give a top-up at 2-3 per cent premium to the exiting home loan rate. They ask for less documentation too as one is adding up to the existing loan.

However, a person becomes eligible for a top-up loan only after certain period of repayment of his/her existing loan.

Most lenders give a top up loan to those who have paid the home loan on time for at least three years. The repayment track record helps the bank or housing finance company (HFC) assess the customer better. In the three-year duration, there are chances that the property value may have gone up. This gives the lender flexibility to give more money.

The amount of additional loan that a person can borrow depends on the following three factors:

Loan Outstanding: Lower the outstanding balance, higher the top-up one can avail.

 

Current Market Value of the Property: The rise in market value of the property will also make the borrower eligible for higher top up loan.

 

Borrower’s Repayment Capacity: Despite the ongoing home loan, bank will assess your current income and your ability to repay the amount.

Every bank has its own underwriting principals to decide on the quantum of loan it can lend. Currently, as per the general industry trend, the home loan outstanding and the top-up combined cannot exceed 70 per cent of the property value. Yet, some lenders may even have a cap on the maximum loan they can disburse. One of the market leaders in home loan has a cap of Rs 3 lakh as the maximum top-up a customer can avail.

The borrower must look at the fine print to know the caveats a bank may have for this product. One such widely followed principle is, any prepayments made towards your home loan (partial or full) will be first adjusted towards your top-up loan. Top-up loans are long tenure loans and, therefore, cheap. In some cases, banks keep the tenure same as the existing home loan. This results in higher interest payment.

The taxation on top-up loan varies depending on the end use. You can get an Income Tax deduction on the interest part if the top-up is used to acquire a new property or used in construction or repairing a property. If the person uses the money for any other purpose, no deduction is allowed.

The principal portion is allowed deduction only for a loan taken to buy or construct a housing property.

Top-up helps raise cheap, high amount but before you opt for one, remember you are raising another debt against your house.

The writer works with ApnaPaisa.com