Ways to ease your top-up loan burden

By consolidating borrowings, the total EMI burden and interest cost can be reduced

With the Reserve Bank of India cutting the repo rate by 25 basis points last week, borrowers would be happy that the rate cut season is beginning. While most banks haven't still signalled base rate cuts, it is only a matter of time before they do so.

In such a situation, a potential borrower is likely to get good opportunities. For one, if you have taken a home loan recently, if the banks cut rates significantly, there could be a case for reducing your home loan burden by re-negotiating with the bank or shifting lenders. But if there are only a couple of years remaining for the closure of the home loan, it makes little sense to re-negotiate or shift because you would be paying mostly the principal amount.

Interest rate cuts also throw up other opportunities. For example, you could take a top-up loan - home or personal - at a lower rate. But there are certain things that you should be wary about before taking such loans. A few tips to ease the process.

Consolidation: Many of us have several loans at the same time. These include home loan, auto loan, personal loan, credit card dues and so on. And only the home loan payout gives some tax benefit, the rest are a drain on the finances.

If you already have a property through a home loan and have paid the equated monthly instalment for a few years, taking a top-up could be a good way to leverage the property's value and reduce the other loans. Non-banking financial institution HDFC offers a top-up loan 12 months after the final disbursement of the property has been made. The rate is 10.15 per cent to 10.50 per cent and the tenure up to 15 years. In case you want the loan while the existing home loan is still on, you can use the loan against property option. In this situation, the rate is higher at 12 per cent to 12.75 per cent.

When you are considering an additional loan of, say, Rs 25 lakh, it is worth prepaying some of your smaller loans like personal loan and consolidating your borrowing against your property. This has a couple of benefits. Home loans or loans against property are long-tenure loans of 15-20 years, so the EMI per lakh of borrowing is the lowest compared to an auto or personal loan, which is of 4-5 year duration. Also, banks consider loans secured against property to be a safer bet and offer the lowest interest rate for such loans compared to other types of loans. So, consolidating your borrowings against your property, assuming the LTV permits, is a sensible option as the aggregate EMI burden as well as the overall interest cost can be minimised.

Eligibility: Banks use the instalment to income ratio (IIR) as a barometer of your ability to borrow. So, the aggregate of existing and prospective EMIs on the loan application under consideration needs to be within a pre-defined level of your current income. Depending on the banks' internal credit policy, this could vary between 40 per cent and 65 per cent for most lenders. Borrowing against a property introduces the additional element of LTV, as described above. So, these two criteria hold the key to determining the loan amount you can borrow. As you shop for a home loan top up, you might need to consider switching your loan to a bank whose policies allow you to borrow the amount that you need. Here again consolidating your personal and/or auto loan will help improve your eligible loan amount. The bank will prepay these loans on your behalf, out of the top up amount sanctioned.

Interest rate: It is normal for existing borrowers to pay slightly higher interest rates than new borrowers. When you are considering a top up loan, it is a good time to shop for a better deal on your rate of interest. Lenders have special schemes running from time to time and you could take this opportunity to switch to such a bank, assuming you are getting the desired loan amount. You can also bargain with your existing bank to renegotiate the existing interest rate downwards, as they would probably like to retain a client who has been repaying the loan in a timely fashion.

As you will notice in table 2, the power of interest rate, higher tenor, consolidation of loans and your loan advisor's search for the best deal, allow you to borrow the additional amount of Rs 25 lakh, for a minor change in your aggregate EMI by Rs 507 only.

Paperwork: If you are availing a top up from the same bank where your home loan is currently running, you will need to put together your latest KYC documents, income documents, bank statements and details of other existing facilities. In case you decide to switch to another bank, you will need additional documents, including a foreclosure letter stating current home loan outstanding and list of property documents in custody of your existing bank (LOD). Both these need to be provided by your current lender. Banks normally take 10-15 days to process such requests. They will use the interim period to convince you not to move your loan elsewhere. The foreclosure letter is valid only till your next EMI is paid, as the loan outstanding changes with each monthly repayment. So, you ideally need to make the switch over in the same calendar month as the date of the foreclosure letter.

Conclusion: It is not possible for borrowers to be aware of all the eligibility criteria or prevailing offers from multiple banks. You are probably best served if you avail the services of a loan advisory service. They will not only offer you multiple options, but also help with all your paperwork. Such loan distributors do not charge clients for their services, as the banks pay them for loans referred. You get unbiased advice and the services of a specialist, which should help navigate the entire process seamlessly.

The writer is co-promoter and executive director of mymoneymantra