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Who can take a Top Up Home Loan? What are the pros and cons of doing so?

Sameer Bhasin is a 30 something professional photographer living in Mumbai. He has recently done up his studio in which he has spent a bulk of his savings. He now has an international client who requires him to purchase a particular camera and some high end camera equipment without which he may stand to lose a prestigious project. Since he already has a mortgage running he is wary of taking a personal loan which works out to be very expensive. Bhasin happened to discuss this problem with a banker friend of his. His friend suggested that Sameer avail of a top up loan on his home loan, which may just be the perfect solution for Sameer!

How does a top up loan work and who can avail it?

  1. A top up loan is an additional amount of loan you can borrow from your bank if you have a home loan account with it.
  2. Usually, this loan amount does not exceed 60-70% of the market value of the property.
  3. This is a loan product that can be availed only by the existing home loan customers of the bank.
  4. You can apply for a top up loan if you have serviced your home loan diligently for a minimum of two years.
  5. The top rung banks of India have the facility of a top-up loan.

Pros of taking a top up loan

  1. This amount can be used to meet your personal requirements (as long as you can prove to your bank that this money will not be used for speculative purposes).
  2. Under Section 24 of the Income Tax Act you can avail tax benefits on the interest paid on your top up loan. In case the proceeds are being used for renovation or construction activity the benefits can be extended to the principal amount as well.
  3. It is considerably cheaper at 11.25 -13 % per annum as compared to a personal loan which is disbursed at an interest rate of 13.5-25% per annum.
  4. The tenure of these loans can be anything between 15-20 years (the maximum being the same as the tenure of your home loan)
  5. Since your property serves as a collateral and you are already an existing customer of the bank, the paperwork is minimal and the disbursal process is easier and the time is shorter.

The cons of taking a top up loan

  1. Each bank has its own method of evaluating your eligibility for a top up loan and there is very little you can do in terms of negotiation.
  2. Some banks have a cap on the maximum limit you can borrow as a top up loan (for some banks the upper limit has been fixed at Rs. 10 lakhs).
  3. Banks may have some terms and conditions such as if you make any prepayments on your home loan in the first year of taking a top up loan, these funds are adjusted against your top up loan and your home loan outstanding remains intact.
  4. Lastly, it is another debt component you are adding on to your existing loan, albeit at a lower cost. However, you need to be confident that you will be able to repay this debt pile responsibly.

If there is a sudden need for funds such as marriage, the education of your child or buying furniture or equipment for your business (as in the case of Sameer) you can consider a top up loan, but only after you have clearly examined the pros and cons of the same.