What is a Top-Up Home Loan?

Assume that you have borrowed a home loan of ₹40 lakh, your loan was sanctioned, you purchased a new home, and everything went just right. However, procuring a home loan does not end your financial obligations. You may still require funds for other reasons. Let’s say that after a year or two, other needs arise, such as making renovations or repairs, for which you need money and consider taking up another loan for more funds. 

But wait! Before doing so, you may want to acquaint yourself with the concept of a top-up home loan.

Not all of your expenses are associated with your property, but that doesn’t mean they should go neglected or cost you a higher interest rate via a whole new loan. It might be in your best interests to opt for a top-up home loan instead of an entirely separate loan. This article will give you all the knowledge you need about a top-up home loan.

What is a Home Loan-Top Up?

Simply put, a top-up loan is an additional amount granted on and above your pre-existing loan. If this pre-existing loan was a home loan, it would be called a top-up home loan.

Lenders offer a top-up home loan on top of an existing home loan with minimal extra documentation. They provide top-up loans over your current loan balance, similar to how you top-up your mobile balance when it runs low. 

Salient Features of a Top-Up Home Loan

A top-up home loan has several constructive features compared to a traditional home loan. A few of them are listed below: 

• The interest rate charged on top-up home loans is nearly the same as the interest rate charged on the existing home loan.
• There are generally nominal/no hidden fees or processing fees involved in processing a top-up home loan.
• There may be no prepayment penalty (a prepayment penalty is where lenders charge prepayment fees if you pay off all or part of your mortgage early to make up for the loss of interest they may have received in the future). However, this varies from lender to lender, and the lender also decides the fee amount. 
• The daily reducing balance calculation calculates interest depending on the daily instalment paid. If interest is calculated daily, it will be calculated on the balance of the loan yet to be paid so, needless to say, it will reduce as the loan gets repaid. As a result, the outstanding principal amount diminishes daily and so does its interest.
• It can have a repayment period of up to 30 years. However, this repayment period varies from lender to lender.

What are the Benefits of a Top-Up Home Loan?

A top-up home loan comes with several benefits. Let us take a close look at some of them:

• Eligibility Criteria are Straightforward: Since you already have an established relationship with your mortgage lender, they will not need to re-evaluate your creditworthiness. Instead, they will base their decision on your home loan’s repayment history. Thus, each EMI payment  should be paid timely. 
• More Affordable than Other Financing Options: Though top-up loan interest rates are typically slightly higher than regular home loan interest rates, they are cheaper when compared to other loans, such as personal loans or loans against property. 
• A Reliable Source Of Emergency Funds: A top-up loan is ideal for emergencies as it does not necessitate a new loan application. This expedites the disbursement procedure, allowing you to fulfil any urgent needs quickly .
• Simple to Repay: With the extended term of a top-up loan, you can set up a flexible and suitable repayment schedule. A personal loan, for example, typically has a tenor of five years; however, you can repay a top-up loan over 15-20 years or more. The term of your current house loan will determine the tenure .

What are the Cons of a Top-Up Home Loan?

Given below are the cons of a top-up home loan that you could take into account:

• Restricted to Existing Home Loan Borrowers: A top-up loan provides an additional amount of funds to a pre-existing set of borrowers; so to take a top-up loan, you first need to have a home loan. 
• Increase in EMI: A top-up loan indicates an increase in the loan amount, so needless to say, the repayment, be it EMI payment or lump sum, increases simultaneously.

Eligibility Criteria for a Top-Up Home Loan 

Home loan top-up eligibility is determined by taking into account a variety of parameters, such as EMI payment history, fixed monthly obligations, current age, retirement age, and so on. Different banks have different eligibility criteria to provide home loan top-ups, so make sure to visit each bank’s official website to check the specific eligibility criteria. Let us discuss a few common requirements:

• Applicants must be permanent Indians or  Non-Resident Indians (NRIs).
• An existing home loan client (including NRIs, PIOs, staff and ex-staff members) who has procured a home loan under any scheme or a staff housing loan is eligible for a top-up loan. 
• A good CIBIL score 
• After the moratorium, a satisfactory and timely repayment track record of one year or more is required.
• There should be no other home top-up loan active.
• Your home loan eligibility can be increased further by entering the income of your co-applicant(s). Reasonable interest rates are generally also provided to women to encourage them to apply as co-applicants.

How Can You Apply for a Top-Up Home Loan?

The application process for a top-up home loan differs from lender to lender. However, we have discussed the general application process below:

Step 1: You must complete an application form requesting a top-up loan. The application form should be accompanied by salary slips and the most recent bank statements. 

Step 2: Depending on the lender’s requirements, you may be required to provide a few additional documents for a top-up loan. Your payback history and credit scores are used to determine your eligibility. The loan is disbursed as soon as the lender verifies this information. The loan is typically disbursed within 48-60 hours.

Documents Required to Apply for a Top-Up Home Loan

Though the documentation involved in obtaining a top-up loan is very minimal, the lender might ask for certain documentation to meet the paperwork formalities:

• An identification proof, such as your Aadhar card, voter ID card, passport or PAN card.
• If you are a salaried employee, you will be required to provide salary slips for the last three months. 
• If you are self-employed, you will have to provide your bank statement for the last six months.
• An address proof, such as your passport or any utility bills.
• You may be required to provide 2-3 copies of your passport-size photographs. 

Things To Consider Before Opting for a Top-Up Home Loan

You should be aware of a few factors before applying for a home loan top-up.

1. Documentation is required when applying for a top-up home loan. For certain lenders, the procedure is identical to obtaining a home loan. You must present home-related paperwork, proof of address, identity, and income proofs.
2. The loan term varies depending on the bank. State Bank of India, for example, offers a top-up home loan for up to 30 years, whilst HDFC Bank offers it for up to 15 years. Some banks, such as Bank of Baroda, determine the loan amount based on the borrower’s age.
3. The interest rates may be slightly higher than the rates on home loans.  They also differ according to your creditworthiness.
4. Since a top-up loan will increase your EMI payment, try to ensure you can meet the increased requirement without delaying any EMI payments. 

Conclusion

A top-up home loan might be beneficial when you have an existing loan requiring more funds. A top-up loan helps meet such money requirements in an affordable and hassle-free manner. 

Consider a thorough cost-benefit analysis against what suits you better – a whole new loan or a top-up loan on the existing loan. However, applying for a top-up is relatively more straightforward and quicker, considering the lender will have already established your KYC requirements and creditworthiness.

Frequently Asked Questions (FAQs)