Home Loans : Top-up
As the name implies this is an amount ‘extra’ or ‘over & above the existing loan. Simply put it is akin to any ‘Top-Up’ that one takes in any other sphere of life like Toppings on the Pizza or for that matter Top-Up in the engine/ brake oil. But one needs to keep in mind that this Top-Up is not the ‘Fill-It: Shut – It: Forget It’ type product. It comes against a significant cost, is secured against the same property already mortgaged, and adds to the existing obligation of the customer. In a way, it is a loan against property that is already mortgaged with the lender.
Such a top-up can be of 2 types based on customer type:
Existing Customer Top-Up: An amount given by the lender over & above the loan of an existing customer
New Customer Balance Transfer and Top-Up: An extra amount offered over & above the principal outstanding of the customer being taken over from another finance institution.
Another classification can be done based on the initiation of Top-Up loan application:
Applied by the customer (Existing or New): Here the existing customer applies to her/ his lender for an extra loan amount Or applied by a customer while transferring her/ his loan application to another lender.
Offered by the lender (To existing customer): Here the lender makes a pre-approved loan offer to the existing customer based on the repayment track record without any explicit application by the customer.
Offered by the lender as retention tool (To existing customer): As a customer retention measure when a customer is trying to get the loan transferred to another financier.
Home Loan Top-up Process
Every lender lends the loan up to a particular value of the property being mortgaged. Hence the Top-up amount can be obtained if there is any difference between the total value of the loan allowable against a property and the loan availed by the customer. Also, the applicant’s income must be enough to pay for the EMIs on the Top-up loan.
Such Top-ups come for larger loan tenures, generally up to the main home loan tenure thus the EMI burden is lower as compared to any other unsecured personal loan which is for short tenure on higher rates. There are many avenues to obtain Top-ups to provide for increased expenses in acquiring/ building/ maintain a house property or for meeting other critical business or personal reason however one has to note that it comes at an ROI which is generally greater than the home loan rate. Unless for a pressing need a Top-Up should not be availed just for them being available easily. The tax benefit on the home loan is not available for the Top-Up Loan.
The process is simple and faster than the original home loan as the property is already verified & mortgaged with the lender, the applicant has already been appraised by the lender. Lenders adopt to take fresh application form for the Top-Up along with fresh KYC. A fresh income assessment is done and the Top-Up is released post-sign-up of loan agreement/ supplementary agreement. When it is pre-approved top-up by the lender then the process is even faster ad no fresh assessment of income is done.
5 Points of Top-Up Home Loan
Reason: Assess the reason for which the loan is being taken and opt for Top-Up only if the reason is unavoidable. If the reason is unavoidable then Home loan Top-Up is the best option as it comes to rates lower the other short term personal loans and also comes at a low EMI due to large loan tenures available.
Monthly Liability: Remember that the same increases the monthly liability and property remain mortgaged with the lender for Top-Up loan tenure or Home Loan balance tenure whichever is higher.
Eligible Amount: Anyone wanting to opt for Top-up must note that the Top-up amount shall be limited to a specific value of the property. Generally, lenders lend home loans up to 80% of the value of the property so if the property is valued at Rs. 20 L then a maximum of Rs. 16 L can be given as a loan if the eligibility basis income of the applicant is met. Now if the customer has already availed a loan where the principal outstanding is Rs. 14 L then the maximum Top-up can be Rs. 2 L only.
Cost: Another noteworthy point is that such unlocking the value of the property comes against a cost where the ROI is generally higher than the Home Loan rate hence it must be obtained when necessary.
Trade-off: If one is looking at selling off the property in near future then raising the principal outstanding on the same property is not advisable as the Top-Up loans get linked with the home loan and only when the entire loan is repaid the property papers can be released from the lender.
End-Use of Top-up Home Loans
Such loans are primarily availed for re-investing the same property or for any other business or personal reasons and the lenders do seek the end-use before granting the loan. The funds should never be taken for any speculative purpose or any activity not considered legal.