What should you avail, a top up loan or a fresh loan?
The rising cost of real estate and additional charges associated with it often leave borrowers financially stretched. If they need additional funds, they may opt to apply for a line of credit despite running the existing home loan. In such scenarios, borrowers have to choose between availing either a top up loan or a different fresh loan.
How to choose between a top-up loan and a fresh loan?
A borrower has an existing home loan of Rs.40 lakh and repays it for the last 5 years. Let’s consider he/she has repaid Rs.4 lakh of the principal to the lender. Thus, the remaining loan amount that he/she is still liable to repay stands at Rs.35 lakh. On the other hand, let’s consider the property value appreciated which is commonplace, and now stands at Rs.46 lakh. In this scenario, this particular borrower is eligible for a top up loan of Rs.11 lakh which includes the appreciated margin of property value as well as the loan principal repaid.
Note that a home loan is provided to a borrower as per property valuation. Up to 90% of the property’s value can be availed as a home loan. A borrower can be eligible to avail of a top up loan over and above an existing home loan if the tentative resultant loan amount is under the current property valuation.
On the other hand, if this borrower applies for a fresh personal loan, a lender will verify his/her FOIR (Fixed Obligation to Income Ratio), and the loan approval will depend on that. Since this borrower is already repaying an existing home loan, his/her FOIR will below, and as a result, it will be difficult for that borrower to avail of a fresh loan at more affordable terms. Also, considering the already existing mortgage, it is highly unlikely that he/she will be able to avail a secured loan.
What is a home loan top up?
As the name suggests, a home loan top up is an additional loan that borrowers can avail to meet their required financial obligations.
Why top up loans are better?
- Applying for a fresh loan has several extra charges associated with it. However, in case of top up loans on home loans, one has to pay a minimum processing fee to avail it. This makes the repayment cost of a new loan higher than a home loan top up.
- The interest rate on a home loan top up is comparatively more affordable over a fresh loan.
- Individuals don’t have to go through any verification process, and they don’t have to submit any extra documents in case of a home loan top up. It reduces the time of loan approval and disbursement. However, in case of a fresh loan, borrowers have to go through this entire process once again.
- Since a home loan top up escalates the total loan amount borrowers can negotiate with their lenders for longer tenor and more flexible terms for their overall loan.
Benefits of a top up loan
The benefits of top up loan are as follows –
- No limitation on end-usage
Individuals can use the top up loan amount for any purpose whether it is just for home renovation or interior decoration or any personal expenses like higher education, vacation, etc. Borrowers can use this money to repay their existing debts also.
- Affordable interest rates
A top up loan on a home loan comes with more attractive interest rates compared to availing a fresh loan like a personal loan. Thus, the repayment cost is lower compared to others.
- No further documentation
When borrowers apply for a top up loan, they don’t have to submit any additional documents. At the time of home loan application borrowers have already submitted the necessary documents and thus they don’t have to do it again.
- Quick approval
The lender already knows about the borrower; therefore, they don’t have to perform the entire verification process again. This saves time and leads to quicker disbursal.
- Tax benefits
Borrowers can avail tax benefits on their top up loans availed on their existing home loans. However, to avail, these benefit borrowers have to use this fund to bear other expenses related to their property. They can claim tax deduction according to Section 24(b) of the Income Tax Act.
Eligibility criteria
There are no separate eligibility criteria for home top up loans. Borrowers with an existing home loan can avail of this loan.
Top up loans are an excellent alternative over a fresh loan. Borrowers planning to avail one such loan can get in touch with HFCs like Bajaj Housing Finance Limited who offers a high loan value of Rs.50 lakh at an attractive interest rate.
Apart from this, the company brings you pre-approved offers to make the top up loan application process easy and less time-consuming. You can check your pre-approved offers by submitting your essential contact details.
Top up loans can help borrowers to manage any financial situation without using their savings. These loans are easy to avail of, and they are typically high-value loans so that you can easily fulfill your financial needs. Thus, borrowers should know about top up loans on home loans before applying.