A top up
loan basically allows you to avail a loan amount on
top of your home loan. The usual loan tenure is
about 10 years and is often offered only after a few
years into the home loan disbursal, as this gives a
fair idea about your repayment track record, which
means no defaults down the line and this also
increases your loan eligibility.
The logic behind a top up loan is the fact that you have already started repaying your loan, hence your outstanding loan amount with the bank has already begun decreasing with each payment. A top up just enables you to utilize that margin towards obtaining a loan that you may urgently require to meet some of your needs.
Utilizing a top up loan
Top up loans are a boon to people who are in urgent need of funds. It is almost like a personal loan, except that it comes with better interest rates though not as good as home loan rates but are based on the prevailing rack rates. You can utilize this loan for any purpose. A top loan on your existing home loan is an ideal choice to pay for your parking space or to fund your son’s higher education for instance.
You can take a top up only when you have a home loan to top up on. The conditions for top up loans vary from bank to bank. You can approach the same bank in which you took your home loan but if your bank does not offer you the option, as some reserve the right to provide a top up, then you could shift the home loan to a bank that is willing to give you a good deal on the top up loan. Keep in mind that you need to have an impeccable repayment track record.
The outstanding loan amount pending with the bank, the market value of the property and your ability to repay a top up, are all taken into account to figure out how much top up the bank gives you. In fact the upper limit on the loan amount is defined based on these three aspects. It is always ensured that the outstanding loan amount you owe the bank plus the top up loan does not increase beyond around 70% of the market value of the property. Also, each bank will have its own upper limit and the loan amount will be restricted accordingly.
Tax benefits are dependent on the purpose for which the loan is utilized. For Vinita, the loan is for parking space, which is part of property acquisition. Hence, she would be eligible for a tax rebate on both the principal and tax repaid towards the top up loan capped at Rs. 1 L and Rs. 1.5 L respectively, which is inclusive of the rebate she would avail from her current home loan.
A sample calculation for Vinita’s top up loan
Let us assume Vinita has taken a loan of Rs.30 L at a 12% interest rate for a period of 20 years and as specified is now in her third year into the loan.
Let us make another assumption that from the time she purchased the property, the value has risen by Rs. 20 L, which pegs the current market value of the property at Rs.50 L.
70% of Rs. 50 L = Rs. 35 L (70% of the value is taken as the margin beyond which the loan will not exceed)
Next, the outstanding loan amount is deducted from the above figure:
Three years into the loan she would have repaid a principal amount of Rs.1.31 L
Remaining Principal amount to be repaid – Rs. 28.7 L
Rs. 35 L ( 70% of market value) – Rs. 28.7 L (principal yet to be repaid) = Rs. 6.3 L
Hence the maximum top up loan she will be eligible for based on this example, is Rs. 6.3 L.
However to avail a top up loan, factors like your repayment capacity based on your income and commitment towards any other loans other than your home loan etc., will be factored in before the bank decides on the exact top up loan amount they can offer you.
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