A top-up loan is an additional loan, which your bank offers to you against your house
If you need funds for purposes such as furnishing your house, buying consumer durables and your children’s education or marriage, the obvious thing that comes to your mind is a personal loan. But if you already have a home loan, you have another option—a top-up loan, which is a cheaper option and offers a longer repayment tenor.
Says Vipul Patel, director, Home Loan Advisors (HLA), an independent mortgage advisory firm, “A top-up loan is an additional loan, which your bank offers to you against your house. Banks give you this loan in addition to a home loan you have already taken from the bank.” So, if you are an existing borrower, you could get such a loan.
Amount and tenor
Illustration by Shyamal Banerjee/Mint
Amount: It varies from lender to lender. Says Patel, “Usually it is around 65-70% of the value of the house. Lenders look at the current price of your property less the amount of home loan you owe and then zero down on the amount of top-up loan they are willing to offer. Some banks don’t give more that Rs. 10-25 lakh, but other banks give higher amounts.” For instance, Citibank India gives as much as Rs. 5 crore. As per ICICI Bank Ltd’s website, they offer loan amounts up to 100% of the original loan. But with most other banks, the amount is lower.
Let’s say, the current market value of the house is Rs. 50 lakh and the existing outstanding loan amount is Rs. 15 lakh. If the lender’s minimum loan eligibility is 60% of the market value, that will come to around Rs. 30 lakh. Therefore, the top-up loan amount you could get is Rs. 30 lakh less Rs. 15 lakh, that comes to Rs.15 lakh.
Tenor: Usually, banks give these loans for up to 10 years. A few lenders also give up to the outstanding tenor on your existing home loan. Top-up loans score over personal loans here as the latter come with an average tenor of five years.
The costs
Interest rate: Says Siddharth Gupta, co-founder, GNBindia.com, a group loan buying portal, “The interest rate that you need to pay on a top-up loan is usually 1.75-2.5% higher than what you pay on a home loan.”
So if your current home loan rates are around 12% per annum, so a top-up loan would be in the range of 13.75-14.5% per annum. Compared with that, a personal loan is very expensive; the average is 18-20% per annum and it can go up to 35-40%.
Fees: Banks usually charge a processing fee that is the same as that on their home loan offering. If you have been a good home loan borrower, which means you have paid your instalments on time and have a favourable credit report, the fees may even be waived by some banks.
When should you take this loan?
Top-up loan should be taken only when you need funds for the long term. Since the loan is against your house, defaulting on repayment may cost you dear. So ensure you can afford to repay an additional loan over your home loan.
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Points to note
•Can’t use top-up loan for speculative purpose.
•You can get this only after you have serviced your home loan for at least six months.
•You could get a higher loan amount if you’ve serviced the home loan for a longer period.
•If your existing banks doesn’t offer top-up loans, you can consider switching your home loan and then applying for it.
http://www.livemint.com/2012/04/26211030/Topup-loans-are-cheaper-optio.html
