Loan Basics. Using top-up home loans for personal needs

Once you are sanctioned a home loan, a significant part of your monthly income goes towards servicing the EMIs. And since home loans are usually taken for the long term, it reduces your ability to save and invest.

In this scenario, a financial emergency like a medical exigency or an unavoidable lifestyle expenditure like a foreign trip leaves you opting for other loans, like personal loans or one against credit card.

However, for home loan borrowers, there exists another viable lending option — a top-up loan. This is an extension of your existing home loan. Lenders offer this facility to their existing home loan customers to realise their personal or professional goals.

Just like a personal loan or one against credit card, there is no restriction on how you can use the top-up loan proceeds. You can use it to renovate your property, buy a new car, finance your holidays, fund your children’s education or marriage. Here’s how they compare against credit cards and personal loans:

Only existing home loan borrowers can get top-up loans. Among them, only those who have made a minimum number of EMI payments with a consistent track record can opt for top-up loans. Some lenders also have an additional eligibility criterion of offering top-up home loans only against completed residential property.

The maximum loan amount in case of top-up loans can vary anywhere from ₹5 lakh to ₹50 lakh, depending on your current outstanding loan amount, existing EMIs and changes in the property value.

Loans against credit cards are pre-approved loans offered by banks to existing credit card holders on the basis of their credit card type, card spends and bill repayment history. Personal loans can be availed by all depending on their loan amount, credit score, monthly income and other criteria.

In case of personal loans, the maximum loan amount ranges from ₹50,000 to ₹15 lakh depending on your monthly income, current EMIs, employer and loan tenure.

It being a pre-approved loan, the maximum loan amount against credit card is pre-set by your card issuer.

Moreover, this amount would never exceed the maximum available credit limit of your credit card. For example, if you have an outstanding balance of ₹50,000 on one of your credit cards and the total limit offered to you is ₹2 lakh, then you can expect a maximum loan amount of ₹1.5 lakh on your credit card.

The tenure in case of top-up home loans can be as high as 20 years, but it cannot exceed the residual tenure of your original home loan. The loan tenure will also depend on your other existing EMI obligations and your monthly income.

The tenure in case of personal loans and loan against credit card usually ranges between one and five years. However, some credit card issuers offer loan against credit card for as low as three months. The interest rates of loans on credit cards start upwards of 11.50 per cent per annum, while those of personal loans range anywhere between 10.99 and 24 per cent per annum.

In case of top-up loans, lenders usually price them at about 100 basis points (bps) higher than home loan rates. Some lenders also charge the same rates as home loans, which currently starts from 8.35 per cent. This makes top-up loans the cheapest credit option available to existing home loan borrowers.

Besides, the interest component of your top-up loan EMI will qualify for tax deduction under Section 24 if the loan proceeds are used for the renovation, alteration or repair of your residential property. When the loan proceeds are used for construction or purchase of new property, the amount paid towards principal and interest repayments qualifies for tax deductions under Section 80C and Section 24, respectively. Personal loans or loan against credit card do not offer any tax benefits.

While loans against credit cards are disbursed within the same day of application and personal loans within 2–7 days, disbursal of top-up loans can take anywhere from seven to 10 days.

Hence, if you are an existing home loan borrower, and looking to borrow a big amount, you can opt for a top-up loan. Not only are their interest rates lower but they also offer longer loan tenures. You can even claim tax benefits on your top-up loan if you avail it to renovate your existing property or buy a new one.

But you will have to wait for at least a week for the amount to be disbursed. If you need immediate funds or if you are looking for much shorter tenure loans, opting for a loan against credit card or personal loan is better.

The writer is CEO & Co-founder, Paisabazaar.com

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