Things you should know before taking a top-up loan

Home sales in the top eight Indian cities dropped by 7% in the third quarter of 2020, according to a report. One of the primary reasons for this is the present economic slump, which has forced many to reconsider the spending on a property purchase.

To encourage more buyers, the RBI has also reduced its repo rate, in turn, causing a reduction in housing loan rates as well. However, in some cases, the home loan amount is not sufficient in handling all the associated expenses. Additional financial assistance may be necessary besides the housing credit.

In this situation, availing a top-up loan on an existing home loan can cover up the miscellaneous charges. Almost every financial institution offers this credit option. Still, a potential borrower must fulfil specific criteria to receive benefits. Hence, one must know the variables of a top-up loan before submitting an application.

What is the purpose of a home loan top-up?

A top-up loan is a provision offered by HFCs that allows borrowers to avail additional fund on their existing home loan. Individuals opting for refinancing can avail this feature to gain an affordable interest rate and save more.

Hence, borrowers must be well aware of the specifications related to home loan top-up to make the best use of the sanctioned fund.

Factors related to a top-uploan

Irrespective of the credit variants, mismanagement of the finances can burden a borrower significantly. Hence, an individual must know about the top-up loans on home loans and its variables to make the best decision. Some of them are mentioned below.

• Generousfunds- The amount disbursed against a top-up loan on a home loan is quite lucrative. As the credit form has no end-usage flexibility, the funds can perform as liquidity or a financial source during emergencies. Ideally, top-up loan value depends on the LTV ratio of existing home loan.

Many HFCs offer a top up loan of up to Rs.50lakh with a straightforward refinancing facility. They also provide pre-approved loan offers that quicken loan approval process. These offers are levied on products like credit cards, loan against property, business loan, etc. You can check your pre-approved offer by entering your name and contact number.

• Interest rate- The interest rate levied on atop-up loan can be lowered by opting for a balance transfer. This also enables a borrower to gain better services and features from the preferred financial institution. Before initiating an application, borrowers should know about home loan balance transfer, including its pros and cons.

Additionally, if applicants have a good CIBIL score and repayment history, they can negotiate with the loan manager regarding the interest rate reduction.

• Documentation-Since a top-up loan can be availed on an existing home loan, borrowers do not require to go through the hassle of documentation. This facilitates prompt loan disbursal and approval.

• Tax Benefits-Similar to the tax benefit on a home loan, borrowers can claim a tax deduction on a top-up loan. Article 24B of Income Tax Act, a borrower can receive upto Rs.2 lakh as tax deduction on interest payable. Keep in mind that this limit is applicable when top-up loan is availed to renovate or repair a let out property. For self-occupied properties, the limit is Rs.30000.

Apart from the discussed factors, individuals should note that the repayment term of a top-up loan depends on an existing home loan tenure.

Hence, availing a top-up loan removes the hassle of looking for multiple loan variants from a borrower’s end. Though the loan variant comes with borrower-friendly benefits, individuals must know how much home loan EMI can afford before applying for an additional top-up loan. This keeps unwanted accruing of interest at bay and encourages efficient savings.