What is a top-up loan and when should you opt for it?

There are also tax benefits available for top-up loans only if the utilization is towards investment in the borrower's home (construction, renovation, etc.).

A top-up loan is an additional loan borrowed over and above an existing home loan. People opt for top-up loans in case of emergencies, when they need money urgently, as an alternative to opting for a personal loan or they liquidate assets like gold and property to get money. Experts say taking a top-up loan on an existing home loan is a better option during an emergency, as they are easily available at a good interest rate.

Who can take a top-up loan?
Gaurav Jalan, CEO – Founder, mPokket, says, “First and foremost, one must understand what top-up loans are all about. These are financing options availed by borrowers who already have an existing loan, such as a home loan, with the lender.” Note that even under such a scenario, borrowers are generally only eligible for a top-up loan if they have been repaying EMIs each month, without default, for at least a year.

A borrower’s track record of repayments is one of the key determining factors for being eligible for a top-up loan. When such a loan gets approved, it is usually on the same terms and conditions as the original loan.

How much can you borrow?
Atul Monga, CEO and Co-founder, BASIC Home Loan, says, “In general, banks fund about 70 per cent to 80 per cent of the property value as a home loan. However, not everyone borrows the maximum amount offered to them, so the remaining portion which is currently not borrowed can be availed in the future.” In addition, the portion of the loan which is already repaid by the borrower to the bank can again be borrowed by the customer.

For instance, if the maximum loan amount one gets to borrow is Rs 80 lakh but he/she takes a loan of Rs 50 lakh only and then repays Rs 10 lakh over a period, then the top-up loan available for the borrower would be Rs 40 lakh (Rs 30 lakh which were never borrowed + Rs 10 lakh which were repaid).

How can you use a top-up loan?
While a home loan can only be utilized to buy a home, a top-up loan has no fixed usage of funds and can be utilized for any expenses just like a personal loan. Hence, a top-up personal loan can practically be used for any purpose – be it paying for household expenses, medical emergencies, education or even buying a vehicle. Therefore, experts say top-up loans are an ideal option in case of unforeseen events or whenever one requires a personal loan or a loan against their property or even gold. In such scenarios, it’s a more convenient and hassle-free option.

Monga, says “Generally, top-up loans are taken for home renovations, furnishings, and other personal usages. For all practical purposes, a top-up loan can be treated as a personal loan and can be availed immediately in case of emergency fund requirements.”

Experts say top-up loans are treated as mortgage loans so they have a comparatively higher loan amount, longer tenure, and lower interest rate as compared to a personal loan. Also, the documentation required for a top-up loan is minimal as it is part of the existing loan only, so the disbursement process is quick and easy.

Jalan adds, “The biggest benefit of a top-up loan is that the borrower has to do minimal documentation and the EMIs on the existing loan simply increase to the extent of the additional borrowing. Since a top-up loan doesn’t require the borrower to apply for a fresh loan as it is approved based on one’s existing loan with the lender, it streamlines the entire process and speeds up disbursal. This makes it an ideal option in case of an urgent requirement for money.”

Note that there are also tax benefits available for top-up loans only if the utilization is towards investment in the borrower’s home (construction, renovation, etc.).