June 7, 2013

Home Equity Loan or Top-Up Loan-Why to take?

Suppose you have home loan since few years and currently you are looking at upgrading your home furnish then what will be the best option which may run into 5 lakhs to 10 lakhs? Easier option in such situation will be to go for Home Equity Loan or Top-Up Loans. But let us first look at when one can opt such type of loans.

Hope Equity Loan or Top-Up Loans are similar in nature. Such type of loans are available only to the existing customers. Suppose 5 years back you took home loan of around Rs.50,00,000. Currently your property value increased and at the same time your outstanding home loan decreased, in that case you can go for home equity loan or top-up loans.

But what you mean by home equity in such type of loans? Home equity is the difference in  your current value of property and current outstanding loan on this property. Suppose your property current value is Rs.1,00,00,000 and you took Rs.50,00,000 loan 5 years back but current outstanding is Rs.45,00,000. Then home equity is Rs.55,00,000. You are eligible to take loan on another Rs.55,00,000 value of your property. Usually in such situation banks will maintain their loan amount to 60% to 70% of your property. So even though property value increased drastically but still you will not receive the whole appreciated value of your property as loan. Considering these factors your current outstanding loan is Rs.45,00,000 and current property value is Rs.1,00,00,000 as a rule you are eligible for a loan of another Rs.15,00,000 (Rs.1,00,000*60%=Rs.60,00,000-Rs.45,00,000). Also such type of loans will be available after reviewing your credit history and loan repayment capacity. So maintaining a good financial track record is a must.

But is it worth to take this blindly?

If you have no option left out to go for personal loan (short period range from 1-5 yrs) then you may chose this option. Otherwise first you may look for finance from your existing LIC policies (tenure till policy maturity), Bank FDs (till maturity) or Gold Loans (short term loan period range from 1-3 yrs). Because such type of loan is costlier than the loan on LIC policies, Bank FDs or Gold Loans, but cheaper than personal loans. Please also note that EMI will attract you to go for such loan as tenure will be longer ranging from 10-15 yrs, but deciding on loan requirement is best option.

What is the tax benefit?

It depends on the utilization of this extended loan amount. Suppose the amount is utilized for renovation or further construction of home then you avail the same benefit as of home loan. But if it is used for any other purpose then you are not eligible for any tax benefit.

which Banks are offering such type of loans?

1) SBI’s Top-Up Loan

2) ICICI Top-Up Loan

3) HDFC Top-Up Loan

Advantages-

1) Easy to get it than personal loan as processing is not lengthy.

2) Compare to personal loan rate of interest is lower.

3) Tenure is longer so you will not feel the heat of EMI.

4) Tax benefit if it is used for renovation or property add on.

5) Instead of pledging new property it is best to go with already pledged property.

Disadvantages –

1) As told above lower EMI may attract you to go for such loan but remember that you need to pay for long term.

2) Nothing is free, hence they will pledge your property as security.

3) Their may be certain restrictions on earlier repayment.

4) Usage is tax beneficial only used for property otherwise it is just a normal loan.

5) Eventhough it is part of your existing home loan but few banks may charge some processing fees.

6) Usually this loan will be available after completion of your existing home loan.

7) Rate of interest may be higher compare to other forms of loans like loan on insurance policies or Bank FDs.

Note-Loan in any form is always a bad to one’s financial life. Hence consider the need and if it really need then go ahead otherwise strictly avoid it.

 

 

 

20 Comments

  1. If I have to take TOPUP LOAN FOR RENOVATION, SHOULD I HAVE TO PRODUCE SOME DOCUMENTS FOR

    RENOVATION OR SIMPLY I CAN MENTION IN THE APPLICATION FORM. WHICH IS CORRECT OR

    BENEFICIAL; ?

    Reply
    • Jai-I think you have to produce the proof that your loan is MEANT for that. Beneficial or not depends on you.

      Reply
  2. Hi,

    I have taken the home loan in 2009. In 2016 i took the top up loan and spent that money for construction of my dad’s commericial property.

    Can you please let me know whether i can show the interest and principle of top up loan for my tax exemption?

    Please help me out.

    Reply
      • Thanks for your clarification. I have one more doubt, since I took the top up loan on 2016 whether I would be available for additional exemption of 35 thousand as per 2017 budget?

        Reply
  3. Hi, I have taken a home loan for constructing house and then also taken a top up on home loan as during construction fall short of money. But bank has told me that i cannot taken the tax benefit of the top up loan. So please guide me if i can still file the returns based on the interest paid for Top up on Home loan?? and what document is required to claim the same as the Principle/Interest breakup certificate of my top up loan does not mention that this certificate cannot be submitted for tax claim

    Reply
    • Jamila-Bankers are right that there is no tax benefit for top-up loans. However, if you have proof that you used the loan amount for the purpose of acquisition/construction/repair/renovation of a residential property. The tax benefit is available only on the interest portion of the loan under section 24.

      Reply
  4. I had availed 13L housing loan seven years ago. Now I wanted to renovate the house and I was sanctioned 15L as home-equity loan. Only after part of the documentation, I got to know that for loan< 25L, mortgage @subregistrar office was not require. Can you tell me if the loan amount can be reduced now to avoid mortgaging

    Reply
    • Mrs.Nithesh-Without mortgaging how can a lender give you loan??

      Reply
  5. SIR,

    SBI SNACTIONED AN HOME EQUITY LOAN LAST YEAR FOR RS 1000000. FROM SBI AND I MENTIONED IN MY APPLICATION HOME EQUITY -PURPOSE : HOME REUATION. THEN THE BANK MENTIONED IN MY WELCOME LETTER . HOME EQUITY PERSONNEL LOAN(ALSO MENTIONED THAT THE LOAN SANCTIONED FOR THE PURPOSE WHICH YOU MENTIONED IN YOUR APPLICATION. AMY I GET THE TAX BENIFITS.

    REGARDS
    SUDARSAN.V

    Reply
    • Sudarsan-Home loan taken for a renovation of an existing house, after the issue of completion certificate or after the house has been occupied or let out, is not eligible under Section 80C. However, its interest component is eligible for deduction under Section 24(b) under the head of “income of house property”.

      Reply
  6. I am planning to construct a room (for self use ) on my existing ground floor house I had taken SBI plot and house loan. Shall i go for fresh housing or top up loan . what will be the difference of interest and income tax rebate.

    Reply
    • Kiran-Top Up loan will create hassle free sanction. Hence, go for that.

      Reply
  7. If i purchase a residential plot with home equity loan, mortgaging my second house, is the interest paid is tax deductible? I show my loan for this second house under section 24b.

    Reply
    • Sona-But according to IT Law, a plot (whether it is residential or commercial) will not form a House Property. Definition of house property includes flats, shops, office space, factory sheds, agricultural land and farm houses. Further, house property includes all type of house properties, i.e., residential houses, godowns, cinema building, workshop building, hotel building, etc. Please read the same at IT Dept info at HERE.

      Reply
  8. Thanks for the info and my compliments with your website

    Reply
    • CFD-Pleasure 🙂

      Reply
  9. very informative …good one Basu

    Reply
    • Ashish-Pleasure 🙂

      Reply

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