Why a top-up home loan can be better than business, gold, personal loan
06 Aug 2016
Top-up home loan better than business, gold, personal loan
Taking a home loan is the best feasible way for your dream home. But home loans alone might not meet all of your financial needs. In reality, if you are looking for funds to renovate your home or meet your private or may be business expenses, a top-up loan for your present home loan can also prove to be a cost-effective answer.
What are top-up loans?
If you have taken a home loan and have made well timely repayments, then your bank may also give you the option of borrowing an additional loan equal to the amount of your current housing loan that you have paid thus far. A top-up loan, thus, is a loan provided to you over and above your house loan.
"Top-up loans provide you the advantage to ride any financial crunch you may face while renovating or repairing your private home. You are also free to apply the funds for any other needs, as they come with no preconditions," says Sanjay Bansal, founder & CEO of affordablehomesindia.com.
Top-up loans may be availed best via current home loan borrowers. There are different preconditions too that you want to fulfill before you turn out to be eligible for such a loan.
Minimum period: A top-up loan is available only after you've got started repayment of your private home loan for a minimum duration, depending on your bank. Usually, banks have a minimum compensation duration of 2-3 years before they consider you for a top-up loan.
Proper compensation track report: You want to have a good repayment track document and a healthy credit score rating to be eligible for a top-up loan. If your private home loan repayments have been delayed or are erratic, or if your credit score is low, then your chances of getting a top-up home loan will reduce substantially.
LTV limits: You are allowed to borrow only a certain percentage of your home loan as a top-up loan. For home loans, the LTV (Loan-to-Value) ratio is constant at 80-85% of the present cost of your private property. "So if you have availed 85% of your home cost as a home loan, you will be eligible for a top-up loan only when your property value appreciates, so that the outstanding loan amount, including the top-up loan, does not exceed 85% of the property value," says Bansal.
Tenure: The tenure of top-up loan runs concurrently with that of your home loan. So when you have 10 years closing for your home loan compensation, your top-up loan tenure cannot exceed the remaining time period.
No extra loan: A top-up is offered in your current home loan, as a result there is no need to provide any extra safety or loan.
No precondition on utilization of funds: You may use the cash from a top-up loan as in step with your needs. So feel free to apply it for personal or business needs, or closer to home repair and renovation.
Quick processing with low rates rates as compared to personal loans: Since top-up loans are offered most effectively if you have taken a home loan too, and as banks have already have done a thorough background check, this speeds up the loan processing time. Also, the interest rates on top-up loans are far lower as compared to those on personal loans, making them more pocket-friendly. Interest rates on top-up loans, however, usually tend to be 1.5 to 2.5% higher than those on home loans provided by the bank or a housing finance company
. Still, top-up loans are a far cheaper option than personal and many other loans and also offer the advantage of a longer tenure, which helps reduce the EMIs substantially.
As is evident from the table, at the same time as top-up loans are currently available in the 9.45-12% per annum range, banks and FIs charge 11.49-25% p.A. on private loans and 9.60-24% p.A. on gold loans. Even the processing fees are lower in case of top-up loans as compared to those on most other loans, which makes top-up loans a cheaper choice.
When to and while not to take a top-up loan
A top-up loan may be taken when you, as an existing home loan customer, have other financial necessities. "The amount taken as a top-up loan may be used for raising business capital or for big-ticket expenses such as wedding expenses, children's education or marriage, house maintenance, among others. However, as the processing time of a top-up loan may take several days, it will not be as easy as taking a gold loan, especially in situations like medical emergencies.
How to opt for a top-up loan
You may request your bank to provide you a top-up loan when your personal home loan
fulfills the minimum tenure to be eligible for a top-up loan. You can also get a top-up loan from any other bank which offers home loans at lower interest rates and therefore you're planning to shift to that bank.
A top-up loan is, therefore, a good way to raise funds. With low-interest rates and the freedom to use the money as per your requirement, it is, indeed, like a candy cherry at the top of your home loan cake.
By Sanjay Bansal | Founder & CEO | Affordable Homes India|