|A top up home loan is a loan that is extended by a bank to a borrower who already has taken a home loan from the bank. As the name suggests it is a loan that is taken on top of the home loan that a person has already has. This loan is not taken for a specific purpose and could be used as the borrower deems fit but is available on to existing home loan customers. It could be used for decorating your home or a medical emergency.
A top up loan is extended a few years after the home loan is taken by the borrower; the bank is able to assess the repayment behavior of the borrower and can decide accordingly to lend further or not. The idea behind these loans is; since the borrower has already started repaying the loan his liability is decreasing and so can utilize the margin to borrow more.
- It’s a Cheaper Source of Funds Compared to a Personal Loans: A top up loan just like a personal loan can be used for miscellaneous purposes, hence the comparison with them. Just like in a personal loan you do not require collateral, for a top up loan you do not require fresh collateral as the house is already mortgaged for the home loan. Other sources of borrowing require a mortgage. While a top up loan is given at a higher interest rate when compared to a home loan (the interest rate is 1.5% to 2% more than home loan rates); the rates are still lower than personal loans interest rates one would pay if they were to take a personal loan. Thus it is a better option than a personal loan when in need of funds.
- Has Advantages Over other Ways of Borrowing: The loan tenure for a personal loan would be maximum 5 to 7 years, for a gold loan it would be 1 to 3 years, while for a top up loan it could go up to 15 to 20 years too depending on the remaining life of the home loan. Obviously this makes the monthly burden of EMIs lower and gives the borrower a greater flexibility to repay. If one plans to borrow against shares or securities you can get up to only 40% of their value and in case of their value falling you have to make good the difference at a moment’s notice. Taking a loan against property (LAP) means pledging another property, why not use what is already mortgaged? Rates of interest for LAP are also higher compared to a top up loan. While a loan against an LIC policy is cheaper; but one might one to stay away from mortgaging the financially security of their family which would be of utmost importance in case of death of the insured.
- Can Be Useful In Case of an Emergency: If one is need of funds urgently then a top up loan could be your savior. Since the bank already has your documents and property papers you will not be required to submit them again; thus processing can be faster and less cumbersome. Of course you should hold a good repayment record for the bank to be willing to give you a top up loan. In case you have been a responsible borrower getting a top up loan will not be tough or time consuming. You are not required to mortgage anything unlike loan against property/shares/gold/deposits etc. The funds can be used for any purpose so it can come in handy in a wide range of situations.
- Maybe Considered to Pay off Other Loans: If one is looking at consolidating their loans or has a loan that was taken at a very exorbitant rate then using a top-up loan to repay such loan/s is a viable option. Banks may offer top up loans at rates that are same as home loans rates in order the attract customers to make a home loan balance transfer. In such a scenario considering a top-up loan to repay and expensive loan should be considered while keeping other factors in mind.
- May Attract Some Tax Benefits: When the borrower takes a top up loan the bank takes an undertaking about where the funds will be used (while there is no restriction on their usage). So if top loan is used for purposes like acquisition, repair and renovation or construction of a residential property and the borrowers has documents that support it then the borrower is eligible for benefits under Section 24.
Any loan should be taken after weighing all options and carefully considering if one needs the loan at all. The final decision to sanction a top loan and the amount of the loan is the prerogative of the bank and in all cases the applicant will not be sanctioned a top up loan.