Top-up Home Loan Versus Personal Loan: Which One to Choose for Business Expansion

Mar 01, 2017

Rahul Khanna, a married businessman with kids, is in his late thirties. He had acquired his home five years ago and had taken a loan of INR 50 lakh. The current outstanding amount of the loan is INR 35 lakh and he is considering exploring new avenues for expanding his business. Rahul has been in discussions with financial institutions to avail of a personal loan. However, a friend suggested he consider a top-up loan using his home equity.

Rahul is curious with his friend's suggestion and starts researching about such top-up facility. Using this option, borrowers are able to take up an additional amount over their existing outstanding loan from the lenders.

Here are five conditions that are attached to top-up home loans

  1. An individual must have an existing loan on his home from a lending institution
  2. The lenders offer this facility only after a satisfactory repayment track record
  3. The top-up amount depends on the current market value and the outstanding loan amount
  4. The tenure of the additional loan is linked to the balance repayment period on the original loan
  5. The borrowers are not required to provide additional security for availing of the top-up facility

Interest Rate

When compared to personal loans, the home loan interest rate is lower. However, the rate may be slightly higher than the interest on the original loan amount. Moreover, the borrowers may have to pay processing charges at the time of availing of the top-up loan.

Using top-up amount

Most of the financial institutions do not limit the use of the additional amount. However, it is important to note that this money cannot be used for speculative purposes. The funds are usable for home renovations, expanding business operations, children education, or purchasing a vehicle. This makes top-up facility versatile and convenient.

Tax benefits

The funds received as a top-up house loan entail certain tax benefits, which depend on the end use of this money. The borrowers may avail of exemptions under section 80C for principal repayment and section 24 of the Income Tax Act on the interest component. These benefits are available when the money is used for construction or purchase of a new residential property. Tax benefits under section 80C are not available if the funds are used for renovation or extensions. However, interest exemptions under section 24 are allowed. If the money is used for any other purpose, the borrowers are not allowed any tax benefits on the principal repayment or the interest.

Lending institutions would not always approve a top-up home loan application. The lenders consider the repayment capabilities of the borrowers and the market value of the property before sanctioning the money. However, the sanctioning procedure is quicker than the time taken for availing of a personal loan. This is because borrowers already have an existing relationship with the lenders, which eliminates the long approval procedure.