Home loans are not only required at the time of purchase a dream house of your own. They have other uses too. For example, there are home loans for renovating your home, for buying a plot of land or even for construction. Moreover, there are top-up home loans too, which help you in meeting any additional financial requirements.
Top-up home loans are loans which are allowed to existing home loan borrowers. These loans are like personal loans, which can be used for any financial requirement. Top-up home loans, therefore, help existing borrowers meet any financial requirement that they have.
Just like a coin has two sides, top-up home loans also have their merits and demerits. Let’s understand what they are –
Merits of top-up home loans
- Multipurpose use
As stated earlier, top-up home loans are like personal loans. They can, therefore, be used for any personal or commercial needs that you have. You can use the loan to buy furniture, home appliances, or even to plan a trip.
- Quickly available
Since you are an existing home loan borrower, your documents and eligibility credentials are already with the borrower. So, when you apply for a top-up home loan, the lender would not require any documents. Top-up loans are, therefore, quickly approved and sanctioned. You have to apply for the loan, and the funds are sanctioned at the earliest.
- Low interest
Top-up home loans are offered against the security of your home, just like your home loan. They, therefore, have very low-interest rates. Their interest rates are even lower than the interest rates on personal loans.
- Tax benefits
Tax benefits available on home loans are also available on top-up home loans. The repayment of the top-up loan qualifies as a deduction under Section 80C up to INR 1.5 lakhs. The interest paid for the loan also qualifies for exemption under Section 24. So, you can avail tax benefits on your top-up home loan.
Demerits of top-up home loans
- Increase in EMI
When you avail a top-up home loan, your loan burden also increases. Thus, with a high loan amount, even the EMI increases.
- Limited availability
Top-up home loans are available only for existing home loan borrowers. It is not available to others who do not have an initial home loan. So, this loan has limited availability
- No choice of lender
To avail a top-up home loan, you would have to avail the loan from the lender from whom you have availed your home loan. You have no choice in selecting the lender. You would, therefore, have to pay the interest rate determined by your existing lender even if another lender offers the loan at lower interest rates.
- Eligibility for the loan
Top-up home loans are allowed only if you have a clean repayment history of your home loan. Home loan borrowers having a good track record of the loan can only avail of top-up home loans.
- Limit on the loan amount
When allowing top-up home loans, lenders specify the maximum loan amount, which can be availed. The amount is capped as per the lending practices of the lender. This capping limits the scope of the loan if you need higher funds.
Weigh the pros and cons of top-up home loans before you avail them so that you know what to expect from the loan.