Topping-up on your home loan? There's a catch

If you are a home loan customer, top-up loans are for you in case you have additional requirement of loan for extension, renovation, modification, painting or even for additional features like buying a parking lot.

So all you home loan customers, you can get this topping in the form of incremental loans on top of your home loans known as top-up loans.

The top-up loans have some simple conditions to fulfill. As you pay your home loan, your loan outstanding (what you owe to the your lender) decreases, which makes you eligible for these top-up loans. Lenders find it easier to grant these loans as there is very little documentation requirement. Moreover you are adding up more loans into your home loans.

But every lender has a criteria to consider to grant you these loans like you should have serviced (begun repayment) the home loan for a particular period of time. For some lenders it is not compulsory, they exercise their own discretion. It goes without saying that you should have an excellent repayment record.

So how do lenders decide on the amount?

It is dependent on the following factors:

• Your loan outstanding (the amount your need to repay to the lender)
• Your property value (current market value of your property)
• Your repayment capacity (earning and savings)

Another advantage is that you can use this amount even for meeting other financial emergencies as these can be treated as personal loans, where interest rate is better than personal loan.

But you cannot use such loans for speculative purposes. Ideally you should utilise them for modifying, renovating or acquiring add-ons to your existing home as only then you can claim the tax benefits for the top-up loans.

Like if you have utilised the amount for buying the parking space or painting the house then you will be entitled for tax benefit but if you have utilised the funds for buying furniture, fixtures or furnishings then tax benefit will not be available.

These deduction are same as home loan deductions of Rs 100,000 for principal repayment and Rs 150,000 for the interest payment.

What's the catch, then?

Many private sector and PSU banks offer the top-up loans. However, the home loan outstanding and the top-up together cannot exceed 70 per cent of the market value of your property. Added to this, there is a maximum cap, which differs from lender to lender.

But not all is that hunky dory, there are few catches involved which you should know about.

Lenders have certain in-built conditions like that in the first year of availing the top-up, any prepayments made towards your home loan (partial or full) will be adjusted towards only your top-up loan. This way your housing loan stays put for that year.

Another factor to consider is while you may end up getting a substantial amount at a great rate with minimum documentation, you will be able to repay the loan for the same tenure as your home loan.

So till now you were thinking that these are unsecured loans at great rates but remember you lender already has the security, that is in the form of your house.

Most importantly do not forget that you are raising another debt against your home, so you should evaluate all the pros and cons before going for these.