Understanding a Top Up Loan
There are times when we need additional funds to tide over or short-term or medium-term financial needs. These needs can be varied like from buying a bike, taking a vacation with your family, your daughter’s marriage expenses, paying for medical treatment or your child’s education. When faced with such a situation, we either turn to our credit cards or approach a bank for personal loans. Both of these are high cost loans. In fact for credit cards the annualized cost can be as high as 50% and for personal loans, it can be around 24%.
So what options do you have if you don’t want such high cost debt, well there is a facility to get a top up loan, if you are currently servicing a home loan. You can get this additional loan from your existing lender, else you can negotiate with any other bank which is willing to extend you a top up loan.
What is the eligibility to get a top up loan?
- You need to be servicing a home loan.
- You need to have excellent repayment record.
These are the two main criterion, however the bank will take into account the current market value of the property as well as the borrower’s repayment capacity, so that he can repay both the loans simultaneously.
How much loan can be availed as a top up loan?
Maximum you can get is 70% of the current value of your property less the outstanding loan amount.
So if your property is worth Rs. 50 Lakhs and you owe the bank 20 Lakhs, you can get a loan of Rs 15 lakh depending on your bank, which you need to repay in a maximum of 10 years. Again the repayment term depends on the policies of the bank.
What is the interest rate charged on top up loans?
If you are looking to repair and renovate the house then the rate might be
Base Rate + 1.00%
and for other purposes bank might charge you
Base Rate + 2 to 2.5%
Even then these rates are much lower than what is charged on a personal loan or credit card. When compared to personal loans the rate of interest on a top-up loan can be around 4-5% lower.
So if you are a home loan customer, seeking a personal loan, a top-up loan is just what you need. There is no restriction on how you can use the amount. So if you are servicing a high cost personal loan, you can repay that with the top up loan amount. That will reduce your interest burden.
Moreover, if you can prove with documents that you have used the top up loan for construction/repair/renovation of a residential property, you can also avail tax benefit similar home loan deductions of Rs 1 lakh for principal repayment and Rs 1.5 lakh for the interest payment.