Top-up home loans are a relatively new way Indian homeowners can take out more money without having to arrange a separate personal loan. Those who already have a home loan with good payment track records and sufficient home equity qualify for them. At first glance, they look like a good loan option—a large sum of money at reasonable interest rates. But there is a catch of a kind.
Why the top-up home loans are cheaper
The greatest appeal of a top-up home loan is its price. While interest rates on personal loans stand between 11% and 24%, top-up home loans are normally at the same or slightly higher rate than your current home loan—typically anywhere from 8.5% to 10.5%. Lenders consider them secured loans since they are secured by your current property, which greatly reduces the risk for them and the price for you.
How much you can lend
The loan amount differs depending on the existing home loan, your repayment history, and your property's current value. Banks typically allow you a combined loan-to-value (LTV) ratio of around 75% to 80%. Thus, if your property is worth ₹1 crore and the existing home loan is ₹50 lakh, you could possibly get a top-up loan of up to ₹30 lakh, depending on your income and creditworthiness.
Minimal documentation and fast disbursal
Another benefit is that top-up loans involve fewer formalities. Since the lender already holds your property documents and has verified your profile during the original home loan application, the top-up process is often quick and hassle-free. Some banks even offer pre-approved top-up limits to existing customers based on their repayment behaviour.
But here’s the catch: you’re risking your home
The main drawback of a top-up home loan is that you’re putting your house on the line for funds that might be used for purposes completely unrelated to the property—like funding a child’s education, paying for a wedding, or covering medical emergencies. If you’re unable to repay, the lender has the legal right to auction your home, just like with your original home loan.
Do you take a top-up or a personal loan?
A top-up loan is most effective if you need a large amount of money and have no doubts regarding your repayment ability. It's cost-effective and relatively less troublesome to acquire when you already have an existing home loan. For small or temporary needs, or uncertainty about your repayment ability, or even at a greater cost, a personal loan might be more secure because it is not secured.
Bottom line
Top-up home loans are a smart financial tool if used responsibly. They combine the benefits of lower interest and longer tenures, but carry the risk of losing your home if things go wrong. Weigh your repayment ability carefully, and only use this route if you’re certain about your financial stability in the years to come.
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