Rajesh bought a lovely apartment worth Rs 50 lakh in an upmarket locality close to his office. The apartment came up for possession three years down the line. That was the time when Rajesh had just quit his job and decided to pursue further studies. He thought of renting out the apartment. But he realised he did not have finances to fund for the interiors of his apartment, having supported his studies with a major part of his savings.
Rajesh was in a quandary over how to fund for the interiors and his higher studies at the same time. Some friends suggested a personal loan, but the higher rates of interest deterred him. Unfortunately, his course did not qualify for an educational loan. Finally, Rajesh learned about top-up home loans and decided to choose that to relieve him of his financial woes.
What is a top-up loan?
A top-up loan is a loan that is available as a top-up on your existing home loan. After some repayments, the outstanding balance on your loan comes down. This buffer is used for the top-up loan. It is like the ‘top-up’ on the fuel tank of your car or talk time on your mobile phone.
How do top-up loans work?
Top-up loans fulfil the immediate requirements for funds from a person having an existing home loan. As the bank is satisfied with your repayment record and the outstanding balance has come down, a certain amount is considered for further disbursement, at the bank’s discretion. A processing fee is charged.
Eligibility
An existing home loan and a certain number of repayments are the primary requisites. Prompt repayment forms a strong basis for deciding whether a person gets a top-up loan. Every bank/home finance institution has its own set of rules for disbursing top-up loans. Some banks may even refuse top-ups. You may then think of moving your loan to another lender who is ready to give you a top-up loan.
Other factors that go into deciding a top-up loan are the outstanding amount of your original loan, ability to repay extra Equated Monthly Installments (EMIs), other outstanding loans, and the current market value of your property.
Suppose the market value of Rajesh’s apartment has risen to Rs 60 lakh and the outstanding amount in his loan account is Rs 35 lakh. The difference between 70% of market value and outstanding home loan (Rs 42Lakh -35Lakh) is allowed as a top-up loan. So Rajesh would be eligible for a top-up loan of Rs7 lakh.
When to opt for a top-up loan?
A major advantage of a top-up loan is it need not be tied down to your home. The end use of the loan could be for home improvement, funding of education or anything of your choice. So the top-up loan is a kind of personal loan without prohibitive interest rates. The rate of interest is a tad higher than a normal home loan though. And it offers tax benefits too, subject to end use.
Nice article written in simple language. What every ordinary person can understand. A big plus is that the top-up loan is not tied to the home.