The demand for home loan is increasing day by day. Many view this as a positive liability and hence tend to be less hesitant when opting for this kind of loan. However, given the rise in prices of real estate and home loan interest rates in recent times, borrowers are feeling the pinch as they struggle to meet their other expenses. To bridge this gap, financial institutions have introduced the top up loan option. Under this, borrowers can avail an additional loan over and above their current home loan. They can use this to meet education expense, medical expense, business investment, wedding expense etc. A top up is a good loan option when there is an urgent requirement of funds for meeting one’s needs.
Here are five reasons why you should top up your home loan:
Tax benefits – You will be able to avail certain tax benefits on top up loan if you use the loan proceeds for buying or constructing new residential property. However, if you use the money for any other reason, you will not get any tax benefit.
No security needed – Usually banks will not ask you to mortgage your asset when you avail a top up loan as it is given over your home loan. The financial institution will hold on to your home documents until the repayments are made.
Long tenure – The tenure of these loans depend on your home loan’s term. It can go up to fifteen years or so. Financial institutions may set the maximum tenure same as the balance repayment period. The repayment tenure for personal loans tends to be shorter – going up to five years.
Lower interest rate – The interest for such loans is about 1.5% to 2% higher than the bank’s home loan interest rates. With the final interest rate set around 11.5% to 14%, top-up loans are cost effective when compared to the interest charged for personal loans, which may be 14% and up.
Fast and easy – When you had applied for a home loan, you would have submitted all the necessary documents concerning your property with the financial institution. Also, by making timely payment of EMIs and home loan interest rates, you would have managed to improve CIBIL score (if you did not already have a good one). Thus, when you send in your application for a top up, you would not have to go through the documentation and verification stages all over again.
The top up is one of the best options if you wish to borrow funds at a low cost. When compared to personal loans, the interest rate on top-up loans is quite low. The monthly instalments on top up will be lesser as the repayment tenure is longer and interest rates are lesser. It is easy to avail such loans provided that you have been regular in payment of your EMIs and home loan interest rates.
It is very essential that you maintain a good CIBIL score before applying for a top-up loan. Your CIBIL score is a numeric summary of your creditworthiness. Financial institutions will look at your repayment track record before deciding whether or not to extend you this facility. In order to view the list of requirements, including the minimum CIBIL score, go to the website of the respective financial institution. You must always strive to improve CIBIL score if you do not already have a good one. Another point to note is that the top up loan option can work to your benefit by helping you improve CIBIL score. When you choose such a loan, you do not showcase a credit hungry behaviour. This helps to improve CIBIL score and loan eligibility with financial institutions. Remember, the measures that you take to improve CIBIL score can benefit you in all aspects of your financial journey. Not only will financial institutions be more likely to accept your application, they may charge you less (for example – lower home loan interest rates).
There are numerous benefits of taking top-up home loans, especially if you have any emergency funding requirement. But make sure that you compare all the options and examine all avenues before settling on one. Keep in mind that you are raising a second debt, so do not be reckless in your decision, otherwise you find yourself caught in a debt trap.