Today, the RBI has come down on the misuse of home equity loans also known as top up housing loans.
According to the Governor’s statement, “Banks and NBFCs have also been offering top-up loans on other collateralised loans like gold loans. It is noticed that the regulatory prescriptions relating to loan to value (LTV) ratio, risk weights and monitoring of end use of funds are not being strictly adhered to by certain entities. I repeat certain entities. Such practices may lead to loaned funds being deployed in unproductive segments or for speculative purposes. Banks and NBFCs would, therefore, be well-advised to review such practices and take remedial action.”
A home equity loan or a top-up loan allows you to borrow more money from the same lender. These funds can be used for various purposes like home renovations, education, medical expenses, or even debt consolidation. Typically, home top-up loans come with lower interest rates compared to personal loans, making them a more attractive option.
However, borrowers who make use of these loans for investing, especially in the stock market, often face significant risks. “It can be said that such investments can lead to considerable financial losses thereby impacting their ability to repay the loan and risking a foreclosure” says Atul Monga, CEO and Co-Founder, Basic Home loan.
When it comes to borrowers, it also implies a stricter scrutiny from lenders regarding the usage of funds for loans. “It is likely that lenders will end up implementing tighter checks and may even impose more stringent terms and conditions. Borrowers’ creditworthiness can be hampered if top-up loans are misused, thereby making it harder to secure future loans,” says Monga.
_20241003152432_original_image_28.webp)
 (1)_20241002162318_original_image_43.webp)