While searching for loan options to finance a big-ticket expense, you might have come across the term “top-up loan” or “top-up home loan”. Such loans are commonly sought by individuals to fund big-ticket expenses like consumer durables, home renovations, home furnishings, children’s marriage and others. Following are some facts you should know before opting for a top-up loan.
What is a Top-up Loan?
A top-up loan allows you to borrow additional cash, which adds to your existing home loan. This additional amount usually features tenure of up to 10 years and you might be able to avail it only a few years after your original home loan was disbursed. In case you are wonder why banks allow you to take this additional loan, rest assured it is for the additional money you will pay in interest.
As per the lender’s logic, as you have already started paying off the original home loan, your EMI amount has been decreasing and also the payable principal. Therefore, by availing the top-up loan, you are only utilizing the amount that you have already paid off. As you were already approved for the same loan amount earlier, the bank considers offering you the top-up loan as a low risk option.
Firstly, the most obvious eligibility criterion is – you need to have an existing home loan which you have been paying off for some time. Secondly, you must have a good track record with regards to paying off your current home loan. This includes, making all your previous payments on time and in full. Additionally, banks always reserve the right to perform a check of your credit report before extending you the loan. Therefore maintaining a good credit score is of paramount importance to get approved for the top-up loan and receive the best interest rate on it. It is best practice to check your credit report before applying for any loan.
Loan Amount and Tenure
When calculating the loan amount you can be approved for, banks usually consider up to 70% of the total value of the property on which the home loan was provided, less the outstanding home loan principal amount. After that banks consider a margin value of 10% to 15% to come up with a final maximum amount for the top-up loan. In case of many banks, the maximum top-up loan amount that you can receive is Rs. 25lakhs. However, some banks may offer you higher loan amounts.
In terms of tenure, a top-up loan features a maximum tenure of up to 10 years. However, this too can vary from one lender to another. In fact, some lenders allow you to get a top-up loan tenure, which is equal to the outstanding tenure of your current home loan. However, keep in mind that if you choose a longer tenure on your top-up loan, you will have a lower EMI, however your interest payouts will be substantially greater by the time you finish paying off the loan.
Top-Up Loan Interest Rate and Other Charges
As a rule of thumb, top-up loan interest rates tend to be slightly higher than home loans provided by the lender in question. TFor example, HDFC offers home loan at a rate of 9.45% – 9.95%, while its rate of interest for the top-up loans ranges from 9.80% to 10.30%. However, for Union Bank home loan, the interest rates are 9.55% – 9.80% and 10.60% to 10.85% for top-up loans. So the difference in interest rates tends to vary from bank to bank. Apart from the home loan interest rate, which you might be able to negotiate with your lender to a certain extent, another charge to consider is the processing fees, which is a one-time fee that can be up to 2% of the top-up loan principal. You may also be able to leverage your good credit history as reflected by your credit report and high credit score to get a waiver on these processing charges.
This is definitely a no brainer as a top-up loan is available at not only a lower interest rate but also for a longer duration as compared to a personal loan. In addition, most banks do not charge a prepayment penalty on a top-up loan as opposed to a personal loan. Therefore, in case you come into some money in the future, you can pay off the loan without incurring an additional penalty. For more details regarding how top-up loans measure up in comparison to a personal loan, refer to the article top-up home loan vs. personal loan.