Simply put, a top-up loan is a kind of loan given to home loan borrowers over and above their existing home loan. The top-up amount is given at the prevailing home loan rates to the existing home loan borrowers. But there are limits on the amount of the top-up loan. An illustration will help in understanding things better.
Top-up loan availability from ABC Company Ltd
| Less than 1-Yr | 1-Yr to 2-Yrs | 2-Yrs and above | |
| Top-up loan amount | Nil | 20% | 30% |
Suppose an individual already has an existing home loan of Rs 1,000,000 from ABC Bank, which he had taken a year ago. He now wants to go for a loan to fund say, his child's marriage. The individual can opt for a top-up loan in such a case. But the top-up would be available to him only after he has completed one year of repayments with ABC Company Ltd.
In such a case, he will be eligible for a top-up loan of upto 20 per cent (i.e. Rs 200,000) of the disbursed value of the home loan. The eligibility will go upto 30 per cent in case the individual has completed 2 years or more. Thirty per cent is the upper limit for a top-up loan in case of ABC Company.
Even if the individual is not a customer of an HFC but wants to go for a top-up loan from it, he has the option to do so by first opting for a balance transfer to the HFC. But the individual needs to have completed at least 6 months with his previous HFC to shift to a new one. If he opts for a top-up loan immediately in this case, then the individual will be eligible for 10 per cent of the value of the balance transferred from the old HFC to the new one. He will be eligible for a top-up loan of 20 per cent and 30 per cent in case he has completed one year and two years respectively with the new HFC.
Home loan details for XYZ Company Ltd
| Mkt value of property (Rs) |
Actual home loan amt. (Rs) |
Home loan repaid (Rs) |
Outstanding loan amt. (Rs) |
| 1,000,000 | 900,000 | 300,000 | 600,000 |
The upper limit for a top-up loan may differ across various HFCs. For example a certain HFC has a limit of Rs 500,000 or 70 per cent of the market value of the property minus the loan outstanding, whichever is lower. For example, suppose a borrower has taken a home loan for a new property worth Rs 900,000 (i.e. 90 per cent of the cost of the property which is Rs 1,000,000). He has already repaid Rs 300,000 and therefore, has an outstanding loan amount of Rs 600,000.
Top-up loan from XYZ Company Ltd
| Current mkt value of property |
70% of mkt value (Rs) |
Loan outstanding (Rs) |
Top-up loan amt (Rs) |
| 1,200,000 | 840,000 | 600,000 | 240,000 |
Also suppose the market value of the property has gone upto Rs 1,200,000. In such a scenario, he will get a top-up loan of Rs 240,000 (i.e. 70 per cent of 1,200,000 -- loan outstanding of Rs 600,000). Such parameters have to be considered before zeroing in on an HFC.
The biggest advantage with a top-up loan is that individuals can use it to fund their personal needs. Looked at differently, a top-up loan can be used in place of a personal loan to finance individuals' needs. Considering the personal loan interest rates, that's quite a useful 'bargain'.
Banks generally do not bother about the purpose for which the top-up loan is being taken. Some banks though do ask for a letter stating the purpose for which the loan is being taken. This is to confirm that an individual is not taking the top-up loan for unlawful/illegal, gambling or such other purposes.
One disadvantage with a top-up loan though is that tax benefits are not available for such loans unlike those available for a home loan. This is due to the fact that such loans are treated like personal loans and not home loans. Individuals therefore need to evaluate their options well and understand the pros and cons before finalising one.
