Personal Finance

Topping up your home loan

Nalinakanthi V | Updated on January 06, 2019 Published on January 06, 2019

If you own a house already funded by a bank loan, you can apply for a top-up

If you are seeking finances to repair or refurbish your house, a top-up home loan is a good option. Such loans can also be used to buy consumer durable goods such as washing machines, air-conditioners and refrigerators. If you own a house that is already funded by a bank loan, you can apply for a top-up home loan.

Being a secured loan with a primary charge on the underlying property, the interest rate on a top-up home loan is lower than that of personal loans.

What is it?

A top-up home loan is an additional loan amount that is offered by banks, over and above your existing home loan. Given that the customer already has a home loan and her credit history is also available, it makes it easy for the bank to lend additional sums of amount.

Since a top-up loan is given on the basis of the property that is already mortgaged with the bank, the quantum of the top-up will depend on the principal repaid by the customer till the date of application of the top-up loan.

For instance, if you initially borrowed ₹30 lakh for your home and your current loan outstanding is ₹20 lakh, the bank will do a re-valuation of the property to ascertain the current value of the asset.

Assuming the current asset value is ₹40 lakh, the bank may lend up to 75 per cent of the residual value of ₹20 lakh (asset value minus outstanding loan amount).

The actual quantum of a top-up loan amount varies from one bank to another.

The cap on the maximum loan amount for the top-up also varies across banks. For instance, HDFC Bank has capped it at ₹35 lakh, while SBI offers up to ₹5 crore.

Though the nomenclature of the loan suggests home refurbishment as the end use, there is no restriction. You can also use it for any personal or business purposes.

Unlike in the case of personal loans where the tenure is short, top-up loans are offered for tenures as high as 25 years. However, the tenure depends on the residual period of your current home loan, the age and income of the loan seeker, and the property that is offered as collateral.

Cost

The interest rate for a top-up loan is just a tad higher than that of a regular home loan. SBI offers top-up loan to salaried employees at 8.95-9.05 per cent for loans above ₹5 lakh and up to ₹20 lakh. The interest on a regular home loan for a salaried employee for the same quantum is about 8.8 per cent.

If you are a self-employed individual, the interest rate for a top-up loan from SBI ranges 9.1-9.2 per cent. A regular home loan of up to ₹30 lakh from SBI can cost you 8.95 per cent. In contrast, an unsecured personal loan can cost anywhere between 11 and 16 per cent.

Home loan top-ups come at a lower interest rate compared with other secured and unsecured loan options. However, if you opt for a longer tenure, you can end up paying higher absolute interest over the life of the loan, unless you decide to foreclose it. Hence, prepaying a part of your loan as and when you make a windfall or have any surplus funds is a good idea. Other applicable charges include a processing charge, which varies across banks. HDFC Bank charges 0.5 per cent or ₹3,000, whichever is higher, plus GST, for salaried individuals. ICICI Bank charges 0.5-1 per cent or ₹1,500 (₹2000 for Delhi, Mumbai and Bengaluru).

Banks also charge for the valuation of the property. ICICI Bank charges ₹5,000 as administrative charges. SBI charges the customer for advocate’s fee and valuation fee on the basis of the actual cost. Other charges include stamp duty for agreement, property insurance premium and CERSAI registration fee.

If you are looking at a smaller ticket loan and are keen on a quick sanction, you can explore options such as a personal loan. Interest rates on personal loans tend to be higher than those on top-up loans.

However, personal loans are approved faster than top-up home loans as additional documentation such as asset valuation are required for the latter.

The writer is an independent financial consultant

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