Should You Avail Your self of a Top-Up Loan on Your Home Loan?

Most Indians dream of becoming homeowners. Indians associate homeownership with financial stability and mental peace. However, home loans are a long-term commitment and generally involve a substantial amount of money. Home loan EMIs take up a considerable portion of one’s income, even if one opts for the maximum tenor possible.

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However, sometimes, such situations arise that compel home loan borrowers to seek additional funds to take care of certain necessities. For instance, sometimes home loan borrowers find themselves seeking additional funds to take care of a medical emergency. Similarly, many homeowners find themselves needing funds after a few years of buying a home to take care of refurbishments and repairs.

Most home loan borrowers avail of a personal loan to take care of such requirements. However, personal loans are an unsecured form of financing and therefore, lenders charge a very high interest rate on these loans. Therefore, it makes a lot more sense for borrowers to avail themselves of a top-up loan on their home loan when they need money urgently to take care of an emergency.

A top-up loan on a home loan is an additional loan availed of by a borrower already repaying a home loan. The question is: Should home loan borrowers avail themselves of a top-up loan? Is a top-up loan on a home loan a good idea? Before we answer this question, let us look at the pros and cons of home loan top-ups. Doing so would allow us to answer this question in a much better way.

Pros and Cons of a Home Loan Top-Up

Top-Up Loan: Pros

Let us start by discussing the pros of home loan top-ups.

1. Low Interest Rates

The biggest benefit of top-up loans is that lenders sanction these loans at nominal interest rates. If your repayment record is clean and reliable, you will be able to avail yourself of a top-up loan very easily. Further, your lender will charge you a nominal interest rate on these loans – expect to pay about 1% to 2% higher interest rate than what you are paying on your home loan. In comparison, if you avail yourself of a personal loan, your lender will charge you exorbitantly high interest rates, which in turn, will translate into equally exorbitantly high loan EMIs. Thus, repaying a personal loan when one is already repaying a home loan can easily become stressful.

2. Minimal Documentation Requirements and Quick Processing

Borrowers who are already repaying a home loan understand that managing two EMIs can become difficult. Therefore, most of the time, a person avails themself of a second loan when they need the money and need quick access to it. With a top-up loan, the documentation requirement for the loan is minimal as the lender already has all the documents, they would need for loan processing. For this same reason, lenders can quickly process top-up loans. Applying for any other loan product would mean collecting all the documents all over again and waiting at least a few weeks for the loan to get approved and sanctioned.

3. No End-Use Restrictions

Home loans come with end-use restrictions. A borrower can use the loan money only to buy a residential property. Top-up loans on home loans, on the other hand, do not come with any end-use restrictions. Whether you need money to take care of a medical emergency, undertake renovation work, or buy another property, a top-up loan can come to your rescue.

Top-Up Loan: Cons

1. Increased EMI

The maximum tenor that one can opt for in the case of top-up loans is the same as their home loan tenor. So, if you availed yourself of a loan 5 years ago and opted for a 20-year-tenor back then, the maximum repayment tenor you can get on your top-up loan would be 15 years. When a borrower increases the principal amount while keeping the loan tenor same, affording loan EMIs can easily become difficult. If one is not prepared for this responsibility, one can also easily turn into a loan defaulter and entirely diminish one’s chances of being able to avail of a loan in the future. Therefore, borrowers must avail of a top-up loan on their home loan only if their income allows them to afford the increased EMI.

2. Availability Limited to Existing Borrowers and Current Lenders

Top-up loans are available only to existing home loan customers. If you have not availed of a home loan, you cannot claim a top-up loan. More importantly, if you have a home loan, you can avail yourself of a top-up on your home loan only from your current lender and no other lender in the market, even if they are offering you a lower interest rate.

Would a Person Benefit from a Top-Up Loan?

A top-up loan offers many benefits. However, it also increases one’s EMIs by a considerable amount. Therefore, home loan borrowers must avail themselves of a top-up loan only if they need money urgently and can afford to take on the responsibility of the increased EMIs. If one does not need the money for emergency purposes or if there is even a small chance that the borrower might find repaying the increased EMIs difficult, they should not avail themselves of a top-up loan.

If you have decided to avail of a top-up loan on your home loan, read on to learn about home loan top-up eligibility and the top-up loan process.

Home Loan Top-Up Eligibility Criteria

If you want to avail of a top-up loan on your home loan, you must meet the following eligibility criteria:

• l You must have a clean repayment history with no more than one case of a missed EMI in the last year. Further, you should have cleared this missed EMI before the next due date.
• l Home loan borrowers can apply for a top-up loan only after six months of availing of home loan and repaying the subsequent EMIs. Please keep in mind that some lenders require borrowers to clear at least 12 months’ EMIs before they are eligible to apply for a top-up loan. So, applicants must talk to their lender’s representative and get clarity in this regard.
• l One cannot avail of a top-up loan if one has yet to submit some of the documents required for the sanctioning of the home loan.

Home Loan Top-Up Loan Process

If you wish to avail yourself of a top-up loan, follow these simple steps:

• l Applying for a top-up loan is easy. All lenders have a simple form that borrowers must fill out if they wish to avail themselves of a top-up loan. Fill out this form.
• l Since your lender already has most of the documents they will need for loan processing, you will only be required to submit the latest salary slips and bank account statements.
• l Once you submit all the required documents, your lender will verify them. Once the verification is done, your lender will disburse your loan amount into your account. Ideally, this should not take more than 2 to 3 days.

Final Words

Under a top-up loan, housing loan borrowers can avail of up to 60% to 70% of their property’s market value as a loan. Some lenders may even sanction a higher amount. However, most lenders cap the limit at Rs.1 Crore.

A top-up loan is an excellent financing option if you need money urgently. These loans do not take a long time to be sanctioned. The disbursal period is usually 2 to 3 days. Most importantly, these loans draw a low rate of interest, especially compared to personal loans, which is the other financing option most borrowers make use of when in need of funds immediately.

However, a top-up loan can very easily make your EMI unaffordable. Therefore, borrowers must avail of this option after much deliberation. They must avail themselves of a top-up loan only if they can comfortably afford their new EMI.

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