Understanding Top-up Loans and Home Improvement Loans
Becoming a homeowner is a proud moment. You’ve saved every penny you could, tried adding more sources of income, given up on urges, and cut down your expenses, wherever possible, to make this dream come true.
It is obvious that due to the rising prices of residential properties, it is not easy to get enough money to afford a down payment. It is also highly possible that you’ve exhausted a chunk of the savings to pay for the margin money along with the other expenses, such as government taxes, stamp duties, mutation charges, etc.
Besides, if the property you’ve purchased requires additional repairs or fixtures, then you’re looking at an uphill challenge. After all, you’ve used up the savings you have on completing the purchase and now are serving the EMIs that form a significant portion of one’s monthly income. Arranging for funds for home improvement isn’t a cakewalk when your Housing Loan is running.
Well, you do not worry a lot. Understanding the demands of homeowners, most lending institutions these days provide exclusive products to cater to their requirements. Top-up and home improvement loans are one of the most popular options widely available to pay for repair and renovation expenses.
Differences Between Top Up Loan vs Home Improvement Loan
Before you decide which to avail of, you should understand what each loan type offers, and what are its unique aspects. Read on to know more.
Top-Up Loan
It is easy to understand how a top-up loan works. If an individual has an existing Home Loan in a bank or NBFC and thinks they need a renovation in their home but don’t have adequate funds, they can reach out to the existing lender and apply for a top-up on the existing Home Loan.
The rate of interest for a top-up loan is typically, relatively lesser than that of a personal loan but 1-2% higher than that of a Home Loan. The tenor of a top-up loan is lesser or the same as that of an existing loan. No additional paperwork or eligibility requirements are needed for applying for a top-up loan.
The advantage of availing of top-up loan is that it can be used for any housing-related needs such as refurbishing your home or remodelling it.
Home Improvement Loan
There are a host of lending institutions and non-banking finance companies (NBFCs) that offer home improvement loans. These loans have a low-interest rate (10.5% -11.5%) when compared to other types of loans, such as personal loans. The tenor for these types of loan is longer (up to 15 years), unlike a personal loan that is given for a tenor of 2 to 5 years. Even the amount sanctioned is higher than that of a personal loan. However, these loans are given after analyzing the applicant's home and by rough estimation of the cost of improvement of the home.
Highlights of a Home Improvement Loan
Here are some of the highlights of a home improvement loan that you need to be aware of:
- You can avail of up to about 80% of the property value as a home improvement loan
- The loan repayment tenor in case of a home improvement loan is up to 15 years or the remaining repayment tenor of your Home Loan
- The property that is in question must be less than 35-year-old
- Home loan interest rates would vary from 11%–12% p.a.
- You must also submit a renovation estimate to the financial institution for such a facility
- The age of home loan co-applicants as well as that of the applicants must be at least 21 years
Home improvement loans help save on one’s income tax liability. You can avail of up to Rs.30,000 deductions on the interest paid on a home improvement loan following Sec 24 of ITA 1961. The deduction is subject to a limit of Rs.2,00,000 under Sec 24.
Eligibility Criteria to Apply for a Home Improvement Loan
The eligibility criteria to apply for a home improvement loan are as follows:
- Applicants should be at least 21 and not above the age of retirement
- Maintaining a decent CIBIL score is mandatory
- If one does not have a home, he/she can be a co-applicant to enhance eligibility
- An aspiring Home Loan applicant must have an existing Home Loan with a lending institution
- The existing house must be at least one year old
If you have additional financial requirements for other purposes, choose a top-up loan as there’s zero restrictions on the usage of the money. But if you need money for home repair or renovation, a home improvement loan would be your choice. However, make sure you use smart tools like a Home Loan Calculator to estimate the EMI outgo in each case and plan your loan repayment in advance.
Highlights of a Top-up Loan
Here are some of the highlights of a Top-up Loan that you need to be aware of:
- You can avail of a Top-up Loan if you have an active account for a home loan running for 12 months
- The maximum amount that is available as a home loan top-up is up to 80% of the value of your property minus the outstanding home loan principal
- There is no need for a lender’s permission when it comes to using a top-up loan
- The maximum repayment tenor for a top-up loan is either 20 years or the remaining tenor of the home loan
- Interest rates applicable to top-up loans are slightly higher than home loans. Currently, the interest rates vary between 10% and 12% and from one lender to another
You can claim an income tax deduction of up to Rs.30,000 against interest paid against repayments of a top-up Home Loan. To claim this deduction, you have to prove that the money has been used for the renovation and repair of a self-occupied property. The deduction is permitted following Sec 24 of the ITA, 1961.
Eligibility Criteria to Apply for a Top-Up Home Loan
Following are some criteria that you will need to fulfil when applying for a top-up loan:
- No EMI payments of credits should be due. All missed payments must be cleared.
- People should pay off their existing loan within 6 months.
Apart from these, there can be other conditions that applicants need to fulfil when applying for a loan.
*Terms and conditions apply.
