Home loans are humongous financial matters. When you take a home loan, it is usually a large amount of money taken from the bank and paid back over a well spread out stretch of time. Home loans are financial ventures which are well planned out in advance and require a notable amount of time and official documentation to get sanctioned.
Now let’s suppose you have taken a home loan of 30 lakh rupee and planned to pay it out in the course of 5 years. As such, it is already a considerable financial burden draining out your resources steadily every month.
If, within the period of 5 years, some kind of unexpected financial emergency arrives at your doorsteps, like a medical emergency or a need for an investment boost in business, then taking a separate loan to fulfill that necessity can add more pressure on you financially.
This is where a top-up loan can come in very useful. Top-up loans are supplementary loans added to your already running loan scheme instead of creating a new one.
What is a top-up loan?
A top-up loan is essentially a unique feature applicable to home loans, which allows you to get money in excess of the amount agreed upon in the loan scheme.
Taking a top-up loan means you would not have to go through the drill of applying for a new loan, waiting to have your credentials verified and the new loan sanctioned. Instead, the money would be stacked onto the calculations for the existing loan scheme already granted by the bank or NBFC.
The credentials and documentation already presented to the bank for the home loan sanctioning would be utilized to sanction the disbursement of this additional money. The collateral pledged to the bank would be extended in scope for the compensation in case the loan is defaulted by the borrower.
Who is eligible for a top-up loan?
The first and foremost criterion for the availability of a top-up loan is a home loan contract already in execution between the lender and the borrower. This can be a home loan, a home renovation loan, or a house extension loan, but it has to be ongoing, and the asset being funded by the bank has to be already in possession of the borrower.
Secondly, the credit history for at least 1 year of the existing home loan tenure between the borrower and their bank must be impeccable, with the monthly EMI deposits being regular and fully paid.
If these conditions are met, anyone can apply for a top-up loan on their existing home loan scheme.
Terms of a top-up loan:
Top-up loans can be paid back by the borrower through monthly installments of EMI.
A top-up loan’s maximum tenure or payback period can be 15 years.
The loan scheme opted for by the borrower dictates the terms of the top-up loan
Other factors like the borrower’s economic profile, age at the point of maturity of the loan, the property’s age at maturity point of the loan, and so on affect the working terms of the loan.
What factors determine the maximum amount of money available as a top-up loan?
Several factors come into play while assessing the maximum sum you are eligible for when applying for a top-up loan. These are:
- The current income level of the borrower.
- Any other loan schemes of which the borrower is a part.
- The current credit history regarding the existing home loan on which the top-up loan would be applied.
- The value of the top-up loan must not be more than 75% to 80% of the net worth of the property acquired through the home loan.
- After satisfying all the previous factors, the value of a top-up loan cannot be more than 50 lakh INR.
Rate of interest for a top-up loan:
The interest rate for a top-up loan can vary from one financial institution to another and depend on the specific loan scheme.
In the usual cases, the interest rate applied on a top-up loan is similar to that of the home loan on which it is piled up. It can also be slightly higher than that.
However, the interest rate for a top-up loan is always much lesser in comparison to other kinds of commercial or consumer loans like personal loans, for example.
The utility of a top-up loan:
A top-up loan cannot be availed until and unless the purpose of taking it is declared to the bank.
- Once declared, a top-up loan can be used to fund a personal event like marriage.
- It can provide medical support in an emergency like an accident or other health concerns.
- It can be used as an education loan to fund higher education for your children.
- It can provide a boost of investment in order to support a struggling business venture.
What are the main advantages of opting for a top-up loan?
You might wonder why you should opt for a top-up loan when there are so many different specialized varieties of loan schemes in the market. There are certain benefits unique to taking a top-up loan. These are as follows:
Depending on the type of loan you are applying for, there can be several kinds of verification and approval processes to go through before the bank sanctions your loan. Proof of identity, age, and income would need to be verified. In the case of secured loans, the collateral asset would need to be declared, and so on.
However, if the requirement for funds is urgent and critical, such as in the case of a medical emergency, these time-consuming approval processes can become very threatening. In the case of a top-up loan, the necessary verification processes are already taken care of while the main home loan is sanctioned. Hence approval for a top-up loan is very swift, saving valuable time for you. You also do not need to produce any documents again.
A top-up loan can be used for any purpose you deem fit as long as the purpose is not speculative. No legal restrictions prohibit you from channeling the funds how you want to after you’ve declared intent to the bank.
Lower interest rates:
A top-up loan comes with interest rates at least as high as the interest rate for the principal home loan, but it can be slightly higher depending on different factors like the bank itself. However, it will most certainly be a much lower rate than the ones applicable to other commercial-grade consumer loans like personal loans.
A top-up loan can be paid back over a considerable stretch of time that is much longer than the periods allowed for other commercial-grade consumer loans like personal loans. The maximum repayment time for a top-up loan can be as long as 15 years, depending on the borrower’s age and income at the time of the loan’s maturity.
You have the option to pay the top-up loan back in small monthly installments. This would help you plan your future finances more efficiently and manage your economics more easily.
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There are many loan options available today. While borrowing money, it’s always advisable to carefully weigh all your options and make the most prudent choice. If you are already part of an ongoing home loan scheme, then a top-up loan would be your best choice to cope with any additional financial stress.
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