What are the benefits of seeking top up loans?

Posted by petson howard on July 11th, 2016

Top up loans are a cheaper alternative to personal loans. For instance, if you applied for a home loan of Rs. 50 Lacs five to six years ago for a tenure of 15 years and your current outstanding on the loan is Rs. 32 lacs, you can opt for a top up loan if you want to carry out renovations in your house. Instead of taking a personal loan, you can take a top up on your existing home loan. Such loans are available at low interest rates and you will also get tax benefits on the same.

How does it work?

You can apply for a top up loan under certain conditions. These conditions can vary from one bank to another. For instance, your need to have an existing home loan with the bank or housing finance company in order to avail this loan. A bank will offer this loan only after you have repaid the home loan satisfactorily for 6-12 months or a few years. There are few banks that may have different conditions of possession/completion of the house before this loan is sanctioned to the borrower.

Approximately 70-75% of the property’s present market value less the outstanding home loan amount is the permissible amount that can be sanctioned as top up loan.  If a property is valued at Rs. 50 lacs and the outstanding loan is around 25 lacs, the borrower can get a loan of Rs. 10-12 lacs.

There are a few banks that limit the loan amount to the original sanction amount. This means, the sum of top up loan and outstanding home loan doesn’t have to exceed the original amount that was sanctioned as home loan. In such cases, if the original sanction amount is Rs. 40 lacs and outstanding amount on this loan is Rs. 35 lacs, the borrower can avail only Rs.5 lacs as top up loan.

The tenure of repayment of a top up loan is limited to the outstanding tenure of the existing home loan. For instance, if a borrower has only 6 years remaining to repay his home loan, the tenure for repayment of top up loan will not exceed 6 years.

The benefit of seeking a top up loan is that you don’t have to provide additional securities because you have already sought a home loan from the bank.

Usually, the rate of interest charged for this type of loan is 1%-2% higher than the rate of interest on a home loan. Still, when compared to a personal loan, the interest amount is much better. You will also be charged a processing fee on the transaction by the bank. The usage of loan proceeds are not monitored by the lenders. Therefore, the funds can be used for either home renovation, purchasing a car, going for a vacation and so on.

Whether you are applying for a mortgage loan in Mumbai, or a top up loan, make sure you are choosing a reliable lender.