Planning Home Renovations? Here’s Why a Top-Up Loan Might Be Your Best Bet

A home needs to be renovated on a periodic basis. This may involve upgrading kitchens and bathrooms, replacing flooring and windows, adding or renovating rooms, improving energy efficiency, and enhancing outdoor spaces. Renovations refresh the home's look and functionality, adapting to changing needs.

They also cost money. One option to fund a home renovation is to take a personal loan. However, if you already have a home loan, you can opt for a top-up home loan. A top-up home loan has several benefits over a personal loan. 

Benefits of Top-Up Loans Over Personal Loans 

“Top-up loans generally have lower interest rates compared to personal loans. This is because personal loans are unsecured loans and hence carry higher interest rates. Top-up home loans on the other hand, are secured against your property, with your house serving as a collateral. As top-up loans are offered to existing home loan customers and the bank has all the necessary documents required, they are considered more secure,” says Atul Monga - CEO& Co-Founder, BASIC Home Loan. 

The tenure of top-up home loans is comparatively longer, which can lead to lower EMI. In general, the duration of the top-up loans is aligned with the existing loan and banks and NBFCs set up the loan tenure in such a way that it is completed alongside your home loan.

“Additionally, once the top-up loan is disbursed, if the funds are used for specific purposes like home renovation or expansion, you may be eligible for claiming tax benefits up to a certain limit. If you take a personal loan for the same purpose, you may not be eligible for tax benefits,” says Monga. 

On the flip side, a top-up loan is not processed as quickly as a personal loan. This is primarily because the lender may have to look at the property’s current value, your repayment capacity, income and credit history before sanctioning the loan.

Points To Keep In Mind When Going For a Top-Up Loan 

The maximum top-up loan a borrower can avail varies from one lender to another. The loan amount depends on various factors such as original loan amount, remaining tenure and borrower’s income and repayment capacity. Hence, borrowers should ensure they enquire about the maximum loan amount they are eligible for.

Banks and NBFCs typically allow existing borrowers to take a top-up loan after 12 months of disbursement of original loan, provided the borrower has the possession of the property.

“Sometimes, banks can ask the borrower to sign an undertaking stating that they will use the loan amount specifically for home renovation or extension purposes. Banks ask for this declaration because a top-up loan is classified as a home loan in their books,” says Monga. 

If You Take A Personal Loan For Home Renovation 

However, if you do not have a home loan, a personal loan can be the only option. When going for a personal loan, it's essential to start with your primary bank, where your salary is credited or where you have existing loans, such as home or vehicle loans," advises Krishna. This existing relationship can potentially lead to better terms or discounts.

Many banks, especially during festive seasons, offer special promotions. These may include lower interest rates or reduced processing fees. Keeping an eye out for such offers can significantly reduce the financial burden of borrowing.

When selecting a loan, prioritise terms that minimise costs and alleviate potential financial strain in the future. Carefully reviewing the fine print and choosing wisely will help you secure a manageable personal loan that meets your needs.

“Deciding whether to renovate your home with a personal loan this festive season can be a wise choice, as long as you approach it with careful planning. All EMIs (existing and new loans) combined should not exceed 40 per cent of your income in hand,” says Madhupam Krishna, Securities and Exchange Board of India (Sebi) registered investment advisor (RIA) and chief planner, WealthWisher Financial Planner and Advisors.