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Is a top-up home loan right for you?

Last updated on: February 15, 2013 14:31 IST

Is a top-up home loan right for you?

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Rajiv Raj

Top-up loans may be the best choice available if you want to raise some cash for personal purposes. Do explore it before looking into other expensive options.

Rahul Ghanekar, 39 year old doctor needed some money to expand his clinic. While he was talking to one of his old patients about it, the patient mentioned the option of taking a top-up loan at a very attractive rate.

A top-up loan is in fact one of the best options for borrowing funds at a low cost. The tenure of these can go up to 15 to 20 years, depending on your home loan's term. "It is offered only to existing customers. The maximum tenure could be the same as the balance repayment period. However, it is based on our evaluation," says a spokesperson from a housing finance company.

"Usually, the total of outstanding home loan amount and the top-up loan does not exceed 70 per cent of the property's market value.Interest rates on top-up loans are quite low when compared to personal loans. Their EMIs are low because of longer terms, while the amount you would be eligible for is higher," adds another spokesperson from a leading housing finance company.

The money raised from a top-up loan can be used for any purpose (other than speculative activities) including education, marriage or even a holiday.

The author is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India's first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.


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The better option

A top-up loan is often the best choice for borrowing. It offers the advantage of a great interest rate, paperwork that is already done and comfortable tenure. SBI has one of the lowest rates offered for top-up loans at 11.25 per cent. Most top-up loans will attract a rate between 11.25-13 per cent currently.

If compared with other types of loans you can see why a top-up loan is a clear forerunner.

The main advantages of a top-up loan are a lower rate of interest, longer tenure and virtually no paperwork.


Photographs: Rediff Archives
Tags: SBI

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Things to watch out for

1. Even though a top-up loan can be used for any purpose, some banks like Bank of Maharashtra offer a lower rate if the loan is used for actual improvements/extension of the home. The rate is higher if it used for other purposes.

2. If you choose to pre-pay the loan, there might be hefty penalty attached to it; it could be as high as 4 per cent in some cases.

3. Top-up loan may be available to the customer only after s/he has repaid specified EMIs of the original home loan i.e. the home loan should be repaid to some extent.

4. There might be processing charges and other charges which would hike up the cost of the loan.

5. Top-up loans are not suited for everyone as they are meant for people who have an existing home loan and have repaid some specified part of it.

6. The amount of loan is usually limited by the EMIs repaid.

Top-up loans may be the best choice available if you want to raise some cash for personal purposes. Do explore it before looking into other expensive options.


Photographs: Rediff Archives

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