Home loans can buy more

Once you prove your bank that you can repay the home loan,you can ask them to get it topped up. It can be used as a personal loan to finance anything from your interior decoration or childs education to daughters marriage. The top-up is treated as a second loan and is charged a slightly higher interest than the existing home loan usually 1-1.5 per cent,and you need to pay a separate processing fee same as that of the home loan.

Let us suppose you need a loan of Rs 4 lakh to buy a car. Interest rates on car loans start at around 12 per cent. If you approach your home loan provider for a top-up loan,you can get one at a floating rate of 9.5 per cent,thereby saving 2.5 per cent

The tenure of a top up loan can be as long as the outstanding tenure of the home loan. This will help you to reduce your overall cash outflow.

The terms

Banks and housing finance companies extend top-up loans to existing borrowers,on completion of at least six repayments. It is considered as an extension of your existing home loan,but they are not particular about how you spend that money.

What they look for is whether you have been prompt in repaying the EMIs of the existing home loan. If there are backlogs in the repayment track,then the lender may not be willing to offer you a top-up.

Another factor that determines the amount of top-up is the existing market value of your property. The more the property value has gone up,the more you can avail as a top up. The current repayment capacity of the applicant and the amount of loan that is already repaid will also be considered. This is done to ensure that you are capable of servicing the top-up loan.

Apart from these,the banks lending policy also determines the amount you get as a top-up. Some banks have a cap on top ups based on the original loan taken,while some others extend loans on current market values,outstanding balances and repayment capacity. For instance,an HDFC customer can avail a top-up loan subject to a maximum 70 per cent LTV,considering the repayment capacity of the borrower as per their policy. Lets assume your outstanding loan is Rs 5 lakh and the current market value of your property is Rs 10 lakh. In this case,HDFC will offer you a top-up of Rs 2 lakh,if you are eligible for a loan of Rs 7 lakh as per your income statements. ICICI Bank,has a cap of 20 per cent of the original amount borrowed. That is,if you have availed a loan of Rs 10 lakh,you will be eligible for a top-up of Rs 2 lakh,regardless of the value of the property or outstanding balance in your loan account.

The Other Side

The top-up loans are treated as separate loans,and are not eligible for any tax rebates. Housing loan tax rebates can be enjoyed only for the first loan.

A top-up loan is best when you have a longer-term financial requirement,and not in times of urgent short-term funding which you can tide over by borrowing from friends,or by taking a gold loan. If you need a short-term infusion of cash,an overdraft facility with your bank will also make more sense. However,if in times of an inevitable big ticket expense,top-up loans give you the best combination of a flexible tenure and a lower interest rate.

The author is CEO,BankBazaar.com