Top-up Home loans work out cheaper than personal loans

by Maulik Tewari

Top-up Home loans work out cheaper than personal loans for home loan borrowers with urgent financial needs

If you have an existing housing loan but require more credit to meet some big-ticket expenses, it pays to check with your existing financier first.

All you need to do is to approach your home loan provider to check if they provide what is called a top-up home loan.

What is on offer?

A top-up is an additional amount that you can borrow from your bank if you are an existing home loan borrower. State Bank of India, ICICI Bank and HDFC Bank (through HDFC) are some of the banks that offer this product.

One of biggest plus points of a top-up loan is that you can use it for a number of purposes, like a personal loan. But you need to give an undertaking to the bank specifying the use to which the money will be put.

The bank also needs to be assured that the funds will not be diverted for any speculative or /  illegal activity. The tenure of a top-up loan can extend until that of the original loan, or / for a smaller period chosen by the borrower.

But you can get a top-up only after some time has elapsed since you took a home loan.

For instance, HDFC gives a top-up only after 1-2 years (at its discretion) of the final disbursement of the housing loan or /  upon possession / completion of the property financed.

To be eligible for a top-up from SBI, you must have diligently serviced your home loan for at least a year.

How much?

So, how much can you expect to get as a top-up loan?

This can vary across banks. Among the factors that will be considered are the existing market value of your property, which is the collateral, the outstanding housing loan amount and your current repayment capacity.

A bank can arrive at this amount by taking the difference between a certain percentage of the market value of the property and the outstanding loan amount.

For example, if you are an HDFC Bank customer with property worth Rs. 1-crore and an outstanding loan of Rs. 60-lakh, you will be eligible for a maximum of Rs.  10-lakh (70% of Rs. 1-crore, minus Rs. 60-lakh).

A similar formula can be used for State Bank of India (SBI), taking into account 75% of the property value.

Apart from this, there is an upper limit on how much can be given as top-up.

While State Bank of India can lend up to Rs. 2-crore, ICICI Bank can consider giving as much as the original housing loan amount. What makes a top-up attractive is that it is relatively cheaper (10% to 13% rate of interest) than a personal loan.

Topped with benefits..

At interest rates of 14% to 20%, taking a personal loan (does not require collateral) would turn out to be far more expensive.

In some cases, depending on the amount required, a top-up home loan may also be a cheaper alternative to an education loan.

The convenience involved in taking a top-up home loan is another positive.

Since you are already an existing borrower, you can be spared from a whole lot of paperwork that comes with taking a loan.

There is, however, a processing fee, like any other loan.

All said and done, it is advisable to take a top-up loan only if it is for meeting some urgent need. For even though if may not be difficult to top yourself up with an additional loan, paying off one is no mean task.

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