Top-up home loans are cheap, but come with a catch

Mint

a day ago

NEW DELHI
:
Personal loans are among the costlier forms of borrowing. Yet, many turn to them during a financial crunch, overlooking a smarter alternative: Top-up home loans.
A home loan is typically the cheapest borrowing option in terms of interest rate. If you already have a home loan, you can apply for a top-up loan for any purpose, often at rates only slightly higher than your existing home loan.
But beware: While some banks charge just 0.25-0.5% extra, others may quote a much higher premium, making negotiation essential.
Pune-based Nishant Chalasany was only charged 0.25% higher than his home loan rate on the top-up loan. "They did quote me 0.5% higher than the home loan rate, but my repayment schedule and credit rating were quite good. We negotiated and got it down to 0.25%," he said.
Mumbai-based Ravi Muthreja had a bitter experience. The bank quoted him 1.5% higher interest than his home loan rate, which was 7.4%. "I negotiated for over a month, but they reduced it only by 30-40 basis points. This is despite my track record of timely payments and a credit score of 750+. I am still trying and exploring other banks," he said.
Lack of standardization
The rules on top-up home loans vary across banks. 'The RBI has not defined any set parameters as it has for home loans. A borrower must compare interest rates and other charges thoroughly across banks instead of settling with the bank that has their home loan running. One can easily transfer the home loan balance to other banks to get the top-up amount at a lower rate," suggested Ankit Bagadia, associate director, credit card issuer BankBazaar.
You need to pay processing charges and stamp duty as well. 'It could be up to 0.25% of the top-up loan amount, with a cap on minimum and maximum fees. The stamp duty varies across states. It is 0.3% of the top-up loan amount in Maharashtra," said Sameer Shah, founder, JSK Finsol, a loan advisory firm.
Bagadia said the overall charges may be 0.15% of the loan amount. 'If it is higher, borrowers must negotiate with the bank. Banks typically charge higher rates to existing borrowers, and less aware people accept whatever terms and conditions banks specify to avoid the procedural hassle of applying to other banks," he said.
Muthreja, for example, applied for a ₹80 lakh top-up loan nine years after taking the home loan. The bank quoted him ₹43,000 processing charges, including stamp duty. It is 0.5% of the loan amount. 'It excludes GST. I am trying to get it reduced," he said.
You cannot apply for a top-up soon after taking a home loan. You need to pay your instalments for a certain period so that the bank can track your repayment record, and the loan-to-value is available for the top-up loan.
To be sure, you cannot demand just any amount when taking a top-up loan. It depends on your home loan outstanding and the market value of your property. 'Banks tend to give a top-up only after 12 months of taking a home loan. They typically keep the loan-to-value at 65-70%. It means the combined amount of outstanding home loan balance and the top-up value cannot be more than 70% of the value of the property," said loan expert Deepti Jain, who has worked with several banks in the last two decades.
The paperwork
The paperwork is minimal and simple since the bank itself holds property papers. 'I only had to share my identity and address proof. I was mentally prepared for the re-valuation of my property, but it did not happen," said Chalasany.
One only has to mention the reason for taking a top-up. The bank typically does not ask for documentary proof. 'I have taken a top-up twice. The first one was for my higher education, and the second one was for a medical emergency," he said.
Notably, few banks have started asking for documents lately after ex-RBI governor Shaktikanta Das nudged banks a year ago to be more vigilant about the end use of the top-up loan. 'It was found that people took top-up loans to put into stock trading. We have observed that a few banks have started asking for documentary proof of the reason for which you are taking a loan. If it is for educational purposes, you need to share the university document. Similarly, if it is for home renovation, the bank may require invoices or quotations from vendors," said Bagadia.
Can a bank reject the top-up loan request?
'It is possible now that the banks have started verifying the end use. If you apply for a loan for home renovation and the bank visits your home and finds out the renovation is not required, it will reject your loan request. Or if your property value has not increased much, it might think twice about increasing its loan exposure to the same property," said Shah.
Chalasany applied for a fresh top-up loan recently after buying a flat. 'The reason this time was home furnishing. Since we don't have the possession of our flat in our name as yet, the bank did not agree to offer the top-up. It will do it only after possession," said Chalasany.
Top-up loan versus home improvement loan
A home improvement or home renovation loan is different from a top-up home loan. While the former can only be used for a specific purpose, a top-up home loan is like a secured personal loan to be used for different purposes. The interest rate on the former is lower than the latter. The scrutiny, however, is stricter.
'You cannot get a home improvement loan easily. The bank will require you to spend your own money first before it agrees to disburse you this loan. Moreover, the amount will be disbursed in tranches, against which you need to share documents. If you are getting civil work done, you need to share builder quotations. Bank executives will come visit the site before they approve your loan," said Jain.
Things to keep in mind
You also need to inquire about pre-closure charges. 'Typically, they do not charge it, but there could be a minimum duration during which you cannot pre-close your top-up loan. Be mindful of it," said Bagadia.
Chalasany, for example, approached the bank to pre-close his top-up loan six months after taking it. 'They were unwilling to do it. They wanted me to wait for another six months. I asked them to show me if I agreed upon any such condition, but it was not the case. They charged me ₹25,000 for pre-closure. I paid it, but I escalated the matter with the branch manager. It was refunded soon after," he said.
Shah suggested that if one wants a top-up loan with an overdraft facility, it is possible. 'This way, you only pay interest on the amount you have used. It makes your interest payment optimal. Go for it if you don't need the full loan amount in one go."