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.

Zero per cent schemes: How consumers get fooled

As a child when my first milk tooth fell, I was told to keep the tooth under my pillow at night. When I woke up the next morning, I was delighted to discover a one rupee coin instead of my tooth under the pillow. When I asked my parents about it, they told me that a tooth fairy had switched my tooth for a rupee coin during the night.

As a child the story had lots of appeal for me. Of course as I grew older I realised that there was no 'tooth fairy' and my parents placed that one rupee coin.

The stories surrounding zero per cent finance schemes are perhaps of the same genre. The old adage that 'there is no such thing as free lunch' aptly describes the zero-percent-interest schemes.

These schemes were widely popular till a few years back. RBI regulations advising banks to refrain from offering such schemes as well as the general withdrawal of major banks from consumer durables financing has meant that such schemes have not been in vogue for the last 2 to 3 years.

However there are several NBFCs (Non-banking financial companies) that continue to finance consumer durables purchase and also have zero per cent schemes. The main attraction of such schemes is that they influence you to purchase consumer goods that could be more expensive than your wallet size.

The lure of zero percent interest is an added attraction that makes you feel that 'YES' I am getting something free and thus I am able to buy a 'bigger and better' product. But that is just a smart way in which such schemes fool you. Here's how.

So how do these schemes work?

Unlike their names, most zero percent schemes have other costs in built. The biggest cost is that you forfeit the cash discount that you would have got otherwise from the retailer. Also you will be paying some processing/transaction fees and/or advance EMIs (equated monthly instalments).

So let us see how the costs stack up in a so called zero percent scheme.

Example: An LCD colour television costs Rs 48,000 and is available on zero percent EMI scheme for six months (thats is, there is a EMI of Rs 8,000 per month for six months). The consumer needs to pay a processing fee of Rs 1,000. If the customer had bought the same TV by making a full payment s/he could have availed of a cash discount of Rs 2,000 which s/he is not getting if s/he opts for the zero percent scheme.

So it works out like this:

Cost of television set: Rs 48,000

Amount paid/Cost incurred in advance:

Processing fees: Rs 1,000
Cash discount foregone: Rs 2,000
Total: Rs 3,000
Net finance received: Rs 45,000

Payment made by six instalments of Rs 8,000 each (aggregating in all to Rs 48,000 against finance received of Rs 45,000).

The effective interest cost works out to 23 per cent per annum.

Why consumers fall prey to zero per cent finance schemes

However the popularity of such schemes with consumers particularly in festive season cannot be denied. Market sources say that despite being costlier in some ways, consumers prefer to go for these staggered payment schemes and have been highly successful in pushing sales and expanding the market for the durables. This is primarily because of the fact that purchasing through credit cards is very expensive as compared to purchasing through these schemes.

Also, the success of these schemes can be attributed to the availability of credit at the point of purchase, minimal paper work, small ticket size and hence a not-so-stringent eligibility criteria.

So are there any true zero per cent schemes? Yes there are.

Some of them are available on the much-maligned credit cards. The credit card that I have allows me to convert specific spends greater than Rs 5,000 into three-month EMIs without any cost or fees. This is the closest that hard-nosed bankers come to offering true zero per cent schemes. Some other major credit card issuing banks also have similar schemes.

All said and done, the best way to check if a zero per cent scheme is really worth it ask the following questions:

Any fees or charges?

If I pay full amount do I get a discount that I am not getting if I take the zero per cent scheme.

If answer to both the question is no then you have a true zero per cent scheme! So you can now zero in on your zero per cent schemes and spare yourself from being fooled.