Various types of loans are available with housing finance companies to suit the needs and requirements of different individuals. These offerings are in addition to the basic home loan for the purpose of buying a house. One such type of loan is a renovation loan. We have evaluated the characteristics of the renovation loan and its utility to individuals.
Simply put, a renovation loan is a loan taken to cover the repairs and/or renovation of residential property. It is primarily disbursed to carry out civil work like plumbing or doing up the kitchen or painting of the flat. But a renovation loan cannot be obtained if you wanted to undertake say, furniture work. That is because doing your furniture does not fall under the heading of 'civil work'.
For the renovation loan to be sanctioned, a quotation must first be obtained from a qualified civil contractor/engineer/architect. The same must then, be submitted to the HFC for approval. Only after the 'technical department' of the said HFC has approved the quotation will the loan be disbursed.
The sanction limit for renovation loans is around 85 per cent of the property cost. This percentage includes the home loan amount as well. For example, the property cost is say, Rs 1,000,000, and the individual has taken a home loan of say, Rs 7,50,000 (i.e. 75 per cent of the property cost). In such a scenario, he will be entitled to another Rs 100,000 as renovation loan. However, some HFCs sanction upto 100 per cent of the property cost in such cases.
Renovation loans are sanctioned only after the original property papers are in order and submitted to the HFC. The loan will not be sanctioned without them. Therefore, in such a scenario, in case an individual has an existing housing loan from a particular HFC, then he will have to necessarily opt for a renovation loan from that HFC. This is because the original property papers will be with the HFC which will not be in a position to transfer them to another HFC while the home loan payment is on.
Evaluate your options
| Minimum (%) * | Maximum(%) * | |
| Home loan rates | 8.00 | 9.00 |
| Renovation loan rates | 8.25 | 9.50 |
| Personal loan rates | 16.50 | 17.50 |
Both fixed rate as well as floating rate renovation loans can be availed of. The renovation loan rates are generally higher than that for a home loan. For example, as can be seen from the table, IDBI Bank charges 8.00 per cent on its floating rate home loans and 9.00 per cent on its fixed rate home loans. The rates for renovation loans are around 25-50 basis points higher than those charged on home loans.
However, the rate of interest on a renovation loan is lower than that for a personal loan. Personal loans have high interest rates vis-à-vis renovation loans by around 500-700 basis points. Therefore, it makes more sense applying for a renovation loan for your house than applying for a personal loan.
Click here to know more about home loan interest rates
Often, HFCs have a minimum floor amount for renovation loans. For example, a certain HFC may have Rs 200,000 as a minimum loan amount while another HFC may have Rs 100,000 as the floor amount. However, HFCs have maintained a flexible tenure that ranges from 1-15 years.
However, one aspect that individuals need to be aware of -- tax benefits on renovation loans are available only on the interest portion. This is unlike tax benefits for home loans, which are available on both, principal and the interest component. Therefore, you need to evaluate your options well before finalising an alternative.
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