What is top up housing loan
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A top up loan basically allows you to avail
a loan amount on top of your home loan. The usual loan tenure is about 10
years and is often offered only after a few years into the home loan
disbursal, as this gives a fair idea about your repayment track record,
which means no defaults down the line and this also increases your loan
The logic behind a top up loan is the fact that you have already started
repaying your loan, hence your outstanding loan amount with the bank has
already begun decreasing with each payment. A top up just enables you to
utilize that margin towards obtaining a loan that you may urgently require
to meet some of your needs.
Vinita Mistry took a home loan from her friendly
neighbourhood bank two years ago. She bought a cute cozy apartment in a block of
60 apartments in a community enclave, which housed 300 apartments in all. At
that time she did not have a four wheeler and rode a trendy power bike to work,
which was always parked under the stairway that went up to her 5th floor
apartment. She eventually moved office and upgraded to a gorgeous looking small
car. Then she had a problem! Parking Space!!.
She figured she needed to buy that additionally apart from her apartment cost.
She wished to take a loan to cover the cost of purchasing a parking slot. How
can she go about this? Are you stumped like Vinita wanting more amenities or are
you looking for some urgent funds, without expensive interest rates attached to
it? Well, a top up loan on your existing home loan might just be the answer. Let
us understand the various nuances of a top up loan before you decide to
shortlist this as an option.
Utilizing a top up loan
Top up loans are a boon to people who are in urgent need of funds. It is almost
like a personal loan, except that it comes with better interest rates though not
as good as home loan rates but are based on the prevailing rack rates. You can
utilize this loan for any purpose. A top loan on your existing home loan is an
ideal choice to pay for your parking space or to fund your son’s higher
education for instance.
You can take a top up only when you have a home loan to top up on. The
conditions for top up loans vary from bank to bank. You can approach the same
bank in which you took your home loan but if your bank does not offer you the
option, as some reserve the right to provide a top up, then you could shift the
home loan to a bank that is willing to give you a good deal on the top up loan.
Keep in mind that you need to have an impeccable repayment track record.
The outstanding loan amount pending with the bank, the market value of the
property and your ability to repay a top up, are all taken into account to
figure out how much top up the bank gives you. In fact the upper limit on the
loan amount is defined based on these three aspects. It is always ensured that
the outstanding loan amount you owe the bank plus the top up loan does not
increase beyond around 70% of the market value of the property. Also, each bank
will have its own upper limit and the loan amount will be restricted
Tax benefits are dependent on the purpose for which the loan is utilized. For
Vinita, the loan is for parking space, which is part of property acquisition.
Hence, she would be eligible for a tax rebate on both the principal and tax
repaid towards the top up loan capped at Rs. 1 L and Rs. 1.5 L respectively,
which is inclusive of the rebate she would avail from her current home loan.
A sample calculation for Vinita’s top up loan
Let us assume Vinita has taken a loan of Rs.30 L at a 12% interest rate for a
period of 20 years and as specified is now in her third year into the loan.
Let us make another assumption that from the time she purchased the property,
the value has risen by Rs. 20 L, which pegs the current market value of the
property at Rs.50 L.
70% of Rs. 50 L = Rs. 35 L (70% of the value is taken as the margin beyond which
the loan will not exceed)
Next, the outstanding loan amount is deducted from the above figure:
Three years into the loan she would have repaid a principal amount of Rs.1.31 L
Remaining Principal amount to be repaid – Rs. 28.7 L
Rs. 35 L ( 70% of market value) – Rs. 28.7 L (principal yet to be repaid) = Rs.
Hence the maximum top up loan she will be eligible for based on this example, is
Rs. 6.3 L.
However to avail a top up loan, factors like your repayment capacity based on
your income and commitment towards any other loans other than your home loan
etc., will be factored in before the bank decides on the exact top up loan
amount they can offer you.
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What is top-up housing loan ?
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