15 May, 2018 Home Loans
Sometimes little extra is all that we need to fulfill our dreams. Many times we find ourselves in need for little extra funds for any kind of purpose, expected or unexpected, such as renovations in the home, marriage, to expand the business.
Sometimes little extra is all that we need to fulfill our dreams. Many times we find ourselves in need for little extra funds for any kind of purpose, expected or unexpected, such as renovations in the home, marriage, to expand the business, funding child’s higher education or any other personal needs. In such situations, the first source of finance that comes to any one’s mind is a personal loan, but the question is: is this the best option available?
Well, the answer to this question is no! Personal loans are generally costly as they charge a high rate of interest because they are unsecured loans and lenders are at greater risk while funding the same. But what if there is one more kind of product with a comparatively much cheaper rate of interest. The product that is being praised here so much is none other than ‘Top-Up’ Loans. As the name suggests, a top-up loan is a small top-up or an add-on to an existing loan, i.e if a customer has an existing home loan running for a certain period of time he/she can apply for an additional top-up on the same loan. The best part is that every bank or NBFC is quite happy to offer top-up loans to their existing customers, provided they have been keeping an excellent re-payment record with their finances.
Who can avail a top-up loan on home loan ?
Any customer who has been running a home loan with a bank or NBFC can avail a top-up on his current home loan. Although, that’s not it. Every financer has a certain minimum time criterion only after which a customer can apply for a top-up loan, which generally is 1 year i.e. 12 EMIs. Another criterion for top-up is that the one is eligible for only a certain pre-defined percentage of his/her current home loan. Although this percentage may vary from bank to bank but generally it is decided by the LTV i.e. Loan to Value ratio of your existing home loan, for example: if a customer was approved of 80% loan amount of his total property value, then at present total top-up he would be eligible for would be the difference between the principal outstanding and current appreciated price of that property, this is to ensure that the total liability of the customer is covered by the property he is keeping as mortgage with the financer.
Another important thing to understand here is the tenure of the top-up loan. Since here, a customer gets only an add-on over his actual loan, the tenure of this add-on or Top-up loan cannot exceed the tenure of the current loan, i.e. if current tenure left for his/her home loan is 10 years, the tenure of top-up loan cannot be more than that.
Benefits of a Top-Up loan:
Although, there may be few limitations, but still, benefits associated with a top-up loan easily overshadows a personal loan.
1) Cheaper Rate of Interest: Since it is a kind of secured loan, backed by the property as mortgage, it is much cheaper than any unsecured loan such as a personal loan. Rate of Interest on a Top-up loan is generally same as that of running home loan. This marks a huge difference in terms of total interest payable as home loan generally costs at around 8.5% to 9 % of Rate of Interest for a formal profile customer while a personal loan is generally charged around 12% to 15%.
2) Easy and quick approval: Since the banks or NBFCs already has all details of their existing customers, including their re-payment habits, approval for a good customer who has been keeping a good repayment track record can easily get a top-up loan, provided all other conditions are getting fulfilled.
3) No foundation on usage of funds:
Unlike other home loans that is given for purchasing or constructing a property, a top-up loan can be used for any kind of purpose like marriage, medical expenses, home renovation, child’s education etc.
4) Negligible Documentation:
Since the bank/NBFC already have all necessary documents, they might ask for limited documents if necessary like; updated banking or salary slips/ITR.
5) Tax Benefit:
A customer can even claim tax benefit on a top-up loan, if the loan amount is used for acquiring, constructing or any kind of repair on existing residential property.