Top-up home loans are in the spotlight these days. Reserve Bank of India (RBI) Governor Shaktikanta Das recently expressed concern over the rapid growth of these loans, pointing out that some lenders are not adhering to norms related to loan-to-value (LTV) ratios, risk weights and monitoring the end use of funds.
How do these loans work?
Banks and housing finance companies offer borrowers a top-up home loan as an additional loan to their existing home loan. “If a borrower has been paying the monthly instalment of a home loan regularly for 18-24 months, they are eligible for a top-up home loan from the same lender,” says Rishi Mehra, CEO, Wishfin.
The maximum amount offered is the difference between the mortgage loan amount originally disbursed and the current outstanding balance (i.e. the amount repaid).
In theory, the tenor of a top-up home loan can be extended up to the residual tenor of the home loan. “In reality, most lenders limit the tenor to 15 years,” says Ratan Chaudhary, head of home lending at Paisabazaar.
Top-up home loans are typically disbursed within two to three weeks. However, many lenders now offer instant options with same-day disbursement, albeit for smaller amounts.
Cheap and easy to access
The interest rates on these loans are usually the same as the underlying mortgage loan (8.25% and above), or slightly higher. “Taking out a top-up mortgage loan is often cheaper than alternatives such as a personal loan, credit card loan or gold loan,” says Chaudhary. For borrowers with a home loan, a top-up loan is a good source of finance to consolidate other higher-cost debts.
Mehra says that obtaining these loans is easy and requires minimal documentation.
The longer tenure of these loans can also prove beneficial. “If a borrower on an existing home loan has a residual tenor of more than seven years, applying for a top-up home loan can enable them to secure a larger loan amount at a lower EMI than other loan alternatives,” says Chaudhary.
Keep an eye on your budget
The ease with which these loans are available can lead borrowers to spend more than they had planned. “The biggest risk with top-up loans is that homebuyers go over their budget,” says Abhishek Kumar, a Sebi-registered investment advisor and founder of SahajMoney.
Using these loans for consumption and speculative purposes can also be risky. “If the borrower is unable to repay the loan due to lack of income or losses from speculative activities, he or she runs the risk of defaulting on the loan, which could lead to the bank seizing the property,” says Mehra.
Please consider the end use
Many lenders offer a top-up home loan at the time of a balance transfer. “Borrowers who are unable to obtain a top-up home loan from their current lender, or who are receiving a higher interest rate, may opt for a balance transfer and apply for a top-up loan,” says Chaudhary.
Following the RBI warning, borrowers should be cautious about the final use of the loan. “Top-up loans on property are usually meant to fund home improvements. They can also be used for other purposes such as education or medical expenses, provided it is specified at the time of loan,” says Adhil Shetty, CEO, Bankbazaar. Borrowers should avoid using this money to speculate in the stock market.
Kumar suggests having a budget for home and interior improvements and sticking to it.
Customers seeking funds for a vacation or consumer-related purchases should avoid taking out supplementary loans. “Choose a loan specifically designed to finance consumption rather than putting your home at risk,” says Mehra.
· Despite the lower interest rate on add-on mortgage loans, your total interest expense will increase if you select a longer term.
First published: August 12, 2024 | 19:53 IS
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