2020 brought some unprecedented changes in the Indian economy, and the residential sector got hugely impacted due to that. Now that the uncertainties around the economy and jobs are stabilising, the real estate industry is also showing signs of improvement. To make the most of this situation, financial institutions are also reducing interest rates on housing loans, enabling homebuyers to raise funds easily.
However, the amount often falls insufficient since there are lots of other expenses besides the ones covered by a home loan. In that case, a top up loan comes as an ideal financing option, allowing borrowers to avail additional funds over and above their existing home loans. Other than the interest rates, which are quite reasonable in this case, borrowers have a lot of other aspects to pay heed to.
Aspects to be Aware of Before Applying for a Top-up Facility
Top-up loans are mainly available for borrowers going for a home loan balance transfer to lower interest rates or help them during a financial crunch. Following are some factors you should consider before proceeding further:
- Eligibility criteria
The eligibility parameters are pretty lenient in the case of top-up loans. All the existing home loan borrowers can easily apply for it on top of their ongoing loans. However, a regular payment record of nearly 12 months is required to get this credit assistance. Other than that, the eligibility criteria are kind of similar to home loans and assessed before approval.
The repayment tenor can be extended up to 20 years, depending on the financial institution and factors like the period remaining for complete repayment of the existing home loan. Lenders also assess the borrower’s net income, property value, and credit profile to determine the tenor. Note that this duration is generally longer than most credit facilities, including personal loans, gold loans, and car loans.
- Competitive interest rates
As compared to unsecured loan variants, a top-up loan comes at quite affordable interest rates. However, the borrower’s creditworthiness and repayment track record get thoroughly assessed before sanctioning additional funds on top of any high-value loan. And, to understand how much you will be able to save on interest rates during home loan balance transfer, use a top-up loan calculator available on your lender’s website.
Make sure to compare multiple lenders before refinancing your loans, and look out for pre-approved offers provided by popular housing finance companies. These offers are available on several financial products, like home loans, loans against property, etc. All you have to do is submit your name and contact details to check your pre-approved offer and deals on your loan.
- Tax benefits
Per the rules of the Income Tax Act of India, borrowers can claim tax benefits on home loan top-up. Section 24 allows borrowers to claim tax deductions up to Rs.2 lakh on the payable interests, and this applies to only self-occupied properties completed within 5 years. The claim amount is Rs.30,000 only in the case of a top-up loan, subject to the maximum limit of Rs.2 lakh under Section 24(b).
To understand this taxation better, take a look at the following example. Suppose you incur interest to the tune of Rs.35000 on a top-up loan in AY22 and Rs.1.9 lakh on a home loan. Herein, top-up loan interest up to Rs.30000 is exempt, and Rs.1.7 lakh can be deducted from tax liability as home loan interest u/s 24(b).
- Easy documentation procedure
Borrowers can skip the documentation process here as all the required documents already get verified while applying for a home loan. However, it is wise to keep all the updated papers, including bank statements, handy so that you can get prompt approval while choosing the top-up loan on the home loan facility.
Apart from these, one should also check whether part-payment or prepayment facilities are available on such a top-up loan feature, which eventually helps eliminate the financial burden quickly.
As mentioned earlier, the eligibility criteria for this particular financing option are not that stringent. However, minor aspects like having a clean repayment history and decent credit score help in getting approval easily. Also, being a multi-purpose loan, it further allows one to raise funds to meet any kind of financial requirement.