Why Is A Home Loan Top-Up Better Than A Personal Loan?

In a home loan, people borrow an amount considering the estimated budget for building their house. Nevertheless, the construction project may halt if the total expenditure exceeds the approximated budget. 

In such circumstances, they can either opt for a personal loan or a home loan top-up to raise the non-estimated capital. Let’s know what a home loan top-up facility is and why it can be more profitable and convenient for you than the other option.

What Is A Home Loan Top-Up?

It is a credit facility that lets you borrow an additional amount on your existing housing loan. Lending institutions generally provide this financing option to borrowers who have diligently repaid their debts for at least a year.

The lending institution adds the amount you borrow through this option with your outstanding home loan balance. As a result, your instalment amount increases for the rest of the tenure.

Reasons Why Home Loan Top-Up is a More Convenient Option than Personal Loan

Here are the areas where a home loan top-up loan can benefit you:

• Interest rate

Being an unsecured credit facility, a personal loan comes with a higher interest rate. As a result, you will have to pay a substantial amount towards the interest outgo.

On the other hand, in the top-up credit facility, you get the same interest rate as your previous home loan, which is much lower. This way, you can save significantly on interest with the home loan top-up. Consequently, your borrowing cost and the EMI amount get reduced to a large extent.

• Tenure

In a personal loan, you can generally get a tenure of up to 5 years. Due to this short repayment period, you get higher instalment amounts. Paying instalments of both your personal and home loans can lead you to a financially distressing situation. However, you can avoid this hassle by taking a top-up credit with your existing home loan.

The top-up credit comes with the same tenure as your home loan, in which you generally get an extended repayment period of around 20 years or more. For example, if the remaining tenure of your housing loan is 15 years, you will get the same period to repay your newly borrowed credit. As a result of this extended tenure, you can repay the new debt easily.

• Processing time 

The processing time of a personal loan is much longer than a home loan top-up. When you apply for a personal loan, the lending institutions will ensure that you meet their eligibility criteria, understand your credit profile, and verify your documents. All these may consume a long time.

On the contrary, in a home loan top-up, lenders do not have to undergo all these processes, and you get the credit amount much faster. It is because they already have all your details, including documents. Most lenders disburse the credit amount within just a few hours of the loan application.

• Qualification for Debt

Generally, a personal loan comes with stringent eligibility parameters compared to the home loan top-up. Since no collateral is associated with the personal loan, financial institutions ensure that their applicants are credible borrowers and will not default on repayment. This is why, to get a personal loan, you must have a CIBIL score of at least 750.

However, when you go for the top-up loan on your existing housing loan, the financial institution does not undergo this CIBIL score-checking procedure. It just ensures that you have paid your previous dues on time to confirm that you will not miss instalments in future as well.

• Tax benefit

You can leverage tax deductions on the amount you borrow through the home loan top-up. Under Section 24B of the IT (Income Tax) Act of India, you can reduce your taxable income by up to Rs. 2 Lakhs on the total home loan interest amount you have paid in a financial year. Further, Section 80C allows you to get tax deductions of up to Rs. 1.5 Lakhs on the principal portion of your instalments in a financial year.

However, you cannot enjoy the tax deduction benefit on a personal loan, even if you invest the borrowed amount in house construction.

How to Apply for a Home Loan Top-Up

You need to follow the below-mentioned steps to apply for this credit facility:

Step 1: Visit the official website of your preferred financial institution 

Step 2: Find the application form for home loan top-up and fill it in with appropriate details

After this, a representative from your lending institution will contact you to inform you about the procedures you need to follow next to borrow the amount. 

To conclude, a home loan top-up helps in raising finance without much hassle. Since the lender already has your verified details and documents, they sanction the credit amount faster. You do not even have to mortgage a different property for this facility. You get the top-up credit based on your collateral mortgaged while taking the existing home loan.