What is a Top-up Loan? Know its Benefits and Eligibility Criteria

After the RBI’s decision to keep policy rates unchanged in its recent monetary policy meet, home loans will continue to remain affordable. Hence, the demand of this financial product is also increasing, allowing individuals to fund their property purchase at a lower cost.

However, housing credits are a significant financial commitment, including a substantial EMI outgo. Hence, meeting other financial emergencies can be tricky as securing another credit may not be an option. Here’s when a top up loan comes as a favourable financing option.

What is a top-up loan?

It is a financing option that allows eligible individuals to borrow an additional fund over and above their existing home loans. Besides, applicants opting for a home loan balance transfer can avail of this top-up loan facility.

The loan amount here varies with each lender. However, it does not exceed 70–80% of property value, combining top-up and outstanding housing loans. Applicants pay monthly instalments over the years, reducing the outstanding loan amount and LTV ratio. Therefore, a financial institution lends an additional amount against the security of a similar property while maintaining an optimum LTV ratio. Take a look at the following example to understand the same:

Suppose an individual borrows a home loan of Rs.40 lakhs at an interest rate of 10% with a repayment tenor of 20 years to purchase a property worth Rs.50 lakhs. After paying regular instalments of Rs.38,600 each month for 3 years, the principal outstanding amount equals Rs.37,80,000. The value of the property may have increased to Rs.62 lakhs. Consequently, it lowers the loan to value ratio from 80% — the LTV ratio when the individuals borrowed the loan to 61%. Now, based on an individual’s income, he can avail a loan of up to Rs.12 lakhs.

Remember, this is an example to understand how this financial product works. The amount mentioned above may differ.

What are the 5 benefits of a top-up loan?

Here are the following benefits of top-up loan listed below:

1. Quick approval

A borrower’s existing relationship with a lender does not necessitate the latter to review his credit history again to approve the top-up home loan. The lender only checks his repayment history of the housing loan.

2. Source of emergency funds

You do not need to apply for a new loan. It streamlines the disbursal process so that you can fulfil your urgent financial needs with a top-up loan.

3. Longer tenor and easy repayment options

Borrowers can enjoy a longer repayment tenor, lowering the overall financial burden of monthly instalments. Selected lenders also offer flexible repayment options such as part-prepayment or foreclosure facilities so that borrowers can repay a home loan with ease. Several financial institutions also provide pre-approved offers on home loans, LAPs and likes, which streamline the application process. Willing individuals can check their pre-approved offers by submitting their names and contact details.

4. No-end restriction

A top-up loan features no end-use restriction. Individuals can use this fund to finance any financial requirement, be it a vacation or home renovation. However, individuals using this fund for a home renovation can claim a tax deduction on the interest paid under Section 24 of the ITA.

5. Lower interest rate unlike other credit options

The interest rate on this credit instrument is lower than other credit options such as personal loans, and consequently, it lowers the total interest outgo.

Alongside its features individuals should also learn about the eligibility parameters of this financial product.

What are the eligibility criteria to qualify for a top-up loan facility?

Meet the following eligibility criteria before applying for home top-up loans with ease:

• Applicants need to hold an existing home loan account with the financial institution.
• There is no default in repayment of the home loan. Hence, pay off the dues in time as an applicant’s repayment history determines the top-up loan amount.
• If the interest rate of an existing home loan is higher, applicants can opt for a home loan balance transfer as it reduces monthly instalments. Once the application for balance transfer is initiated, individuals can opt for a top-up loan.

However, check the eligibility criteria before applying for a home loan balance transfer. Financial institutions usually want an applicant to meet the following eligibility criteria:

• The applicant has already occupied the property, or the property should be ready to be occupied.
• There are no outstanding dues on the existing home loan. Besides, borrowers must have paid more than 12 monthly instalments.

What are the essential documents required to apply for a top-up loan?

Besides meeting the eligibility criteria, individuals need to submit the following documents:

• KYC documents such as Aadhaar card, passport etc.
• A photocopy of the property documents
• Income proof

A financial institution may demand additional documents. It is ideal to check with a lender before applying for a top-up loan facility.

Keep the pointers in mind and meet the eligibility parameters mentioned above for a hassle-free application process for a top-up loan.

Read Also: Importance of Top-up Home Loan Comparison