Top-Up Home Loans: Features and Utilisation

A top-up on a home loan is a financing arrangement in which you can borrow money over your outstanding home loan. This loan is available only to existing customers with exceptional payment track records.

The maximum sum available under this product varies with the lender. Usually, it is 70-80% of the property's worth, including the outstanding loan balance.

Suppose your property's market value at the time of financing is Rs 40 lakhs. You were approved for a Rs 32 lakhs loan. Over the course of five years, you paid Rs 8 lakhs, but the current market value of the property surged to Rs 50 lakhs. In this case, the maximum top-up funding you will be eligible for will be Rs 16 lakhs. That means 80% of the total worth (Rs 24 lakhs outstanding sum and Rs 16 lakhs top-up loan).

Now, let's talk about the features and areas where you can utilise this loan.

Features of Top-Up Loan on Home Loan

1. Simple Eligibility Criteria

This loan does not require you to undergo stringent eligibility requirements or furnish many documents. That is because the lender has information on your credit behaviour and all the KYC-related information saved in their database.

You will only need to provide information if you have taken a new loan, received an increment in your job, changed your address, or switched employers.

2. Prepayment Option

You don't need to continue the loan for the tenure you have applied for. The home loan lender allows you to make partial payments or opt for foreclosure anytime you wish. Depending upon the terms and conditions, you may have to pay a small fee, which is the percentage of the outstanding amount you prepaid.

3. Overdraft Facility

Many lenders nowadays offer an overdraft facility on home loan products. If you opt for this feature, the lender credits the specific sum to your loan account. You are only supposed to pay interest on the amount you use, not the entire sanctioned sum.

4. Tax Benefits

Many sections under the Income Tax Act provide tax benefits. These perks are available if you use this loan to build a new floor, a new home, or to repair your current home. If you utilise the top up on home loan to pay for your child's higher education, tax benefits are available under section 80E.

Ways to Utilise Top-Up on Home Loan

1. Debt Consolidation

You can use this financing product to combine all outstanding debts under one umbrella and clear them all at once. Top-up loans are much cheaper than credit cards and personal loans. The repayment tenure of this loan is also lengthy.

This option is handy in the following situation.

Suppose you had no credit history when you first applied for a loan, and hence, the lender approved you for costly funds. Over time, you paid all your dues on time, which improved your credit score. Applying for a top-up loan now would offer you funds at a much cheaper rate that you can use to settle high-interest debts.

2. New Furniture

There are many additional costs associated with purchasing a new house. Furniture is the most common. Nowadays, even a single-seat sofa costs over Rs. 25,000. A good dining table and chair will cost around Rs 75,000 to Rs 1,50,000. Besides that, you will need to pay for an air conditioner, a refrigerator, and other essential household items.

Continuing with these requirements, the additional expenses will range from Rs 4,00,000 to Rs 6,00,000. After a few years of living in your new home, using old furniture and making on-time EMI payments, you could apply for this loan to buy furniture and appliances.

3. Floor Addition

When you bought the new home on a loan with a 25-year payback term, you had a 5-year-old child. After 20 years, your family grew to include you, your spouse, your son, and his wife. In this case, you may choose to add a new floor to your existing house structure to accommodate your family and guests better. Top-up loans can help here.

4. Medical Emergency

Financing a new house requires a down payment. Depending on your credit profile, this amount is often 20-40% of the property's market value. After paying this hefty amount, the likelihood that your savings have declined substantially is high.

But what if, after a few years of debt repayment, you face a major medical emergency and have little or no financial resources? A top-up loan might help you pay off your treatment expenditures.

The reason we are emphasising loans at this time is that treating seasonal coughs and colds can cost thousands of rupees, and costs for serious illnesses can reach several lakhs.

If your health insurance plan provides insufficient coverage, a top-up loan might be used to supplement it.

Conclusion

Top-up home loans offer flexible financing options for existing customers with good payment records. They typically allow borrowers to access a percentage of their property's increased value after paying EMI for several years without delay. Top-up loans can be used for debt consolidation, purchasing furniture, adding floors, covering medical emergencies, and providing financial support for diverse situations.