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Till November 2020, the home loan inquiry grew 9.1% from the last financial year. It clearly indicates the heightened credit demand for homes, thanks to lower mortgage loan interest rates, simple eligibility and other borrower-friendly features.
Moreover, considerable surplus liquidity and a repo-linked home loan pricing regime also encourage financial institutions to further lower home loan interest rates. To reap the benefits of this situation, existing borrowers can opt for a home loan refinancing to reduce EMI burden and avail better terms. This home loan balance transfer also qualifies them for a top-up.
What is a top-up loan?
A top-up loan refers to an additional fund that individuals can avail on and above their existing housing loan. For instance, if a borrower opted for home finance of Rs.30 lakh and after 2 years, they need an additional sum of Rs.10 lakh. In such cases, the borrower can turn to a top-up.
Borrowers can avail a top-up loan from their existing lender by maintaining an impressive repayment history. To avail this credit, borrowers do not have to hypothecate assets anew. However, lenders check the creditworthiness and income of applicants before sanctioning them.
Another way to avail a top-up is home loan refinancing. Borrowers can transfer their outstanding balance to a new lender and qualify for better home loan interest rates in India and service terms. Top up loans are additional benefits of a home loan balance transfer.
However, top-up loans also entail several pros and cons that borrowers need to know.
Pros of top-up loan
Following are the key benefits of availing home loan top-up.
● Zero end-use restrictions
Unlike a home loan, a top loan is free from any pre-condition on end-use. Hence, borrowers can utilise this fund for any purpose they please. Usually, individuals opt for a top-up loan to finance home renovations, finance big-ticket purchases, and travel abroad.
● Instant funds
Since a top-up loan is available on top of an existing home loan, lenders sanction this credit within a few hours. Hence, using this credit, borrowers can address any immediate financial liabilities with ease. Moreover, with an existing loan, borrowers may not qualify for other loans than a top-up loan.
However, first, they need to know what is a top-up loan and its eligibility criteria.
● It does not affect credit score
Since a top-up loan come with an existing loan, it does not register as a separate or second loan. Therefore, it does not affect the credit profile of borrowers. Instead, if you opt for a personal loan that will be treated as a second loan and the credit score will dip due to multiple debts on your portfolio.
● Basic documentation
Lenders sanction a top-up loan only above an existing loan, and hence, borrowers need to complete basic documentation to avail this fund. It further expedites loan processing.
● Entitled for tax exemptions
In normal circumstances, a top-up loan does not offer tax benefits. However, if you can prove that the fund used for home repair/renovations/constructions/acquisition of residential property, you claim tax exemptions on interest paid against this credit under Section 24(b). However, the cap of tax deductions should be within Rs.2 lakh for a home loan and top-up loan combined in a financial year.
Besides knowing what is top-up loan and its advantages, borrowers should also consider its demerits.
Cons of top-up loans
Following are some drawbacks of top-up loans.
● Limited funds
Lenders approve only a limited sum as a top-up loan after checking the creditworthiness and existing loan corpus. However, borrowers can use a ,home loan calculator to check the amount they can avail a top-up loan.
● Only available to existing borrowers
Top-up loans are available only to existing home loan borrowers. New borrowers will need to wait for a pre-specified period after they availed a home loan. Moreover, lenders offer top-up loans only to those with a spotless repayment history and high monthly income.
● Additional liabilities
Although drawn on a primary home loan, individuals have to repay the loan through EMIs, which adds to initial EMI payable. Therefore, it can cause additional financial burden if not planned finances beforehand.
Therefore, only knowing what a top-up loan is not sufficient. Existing borrowers need to weigh its pros and cons before applying for this credit.