Over-leveraging with top-up loan can put your home at risk
Top-up home
loans are currently in the spotlight. Reserve Bank of Onida (RBI) Governor
Shaktikanta Das recently raised concerns about the rapid growth of these loans,
nothing that some lenders are not adhering to regulations related to
loan-to-value (LTV) ratio, risk weights, and monitoring the ends use of funds.
Banks and housing
finance companies offer a top-up home loan to borrowers as an additional loan
on top of their existing home loan. If a borrower has been paying EMIs
regularly on a home loan for 18-24 months, they become eligible for a top-up
home loan from the same lender.
The maximum
amount offered is the difference between the originally disbursed home loan
amount and the current outstanding (that is, the sum repaid).
A top-up
home loan’s tenure can, in theory, extend up to the residual tenure of the home
loan. In reality, most lenders cap the tenure at 15 years.
Top-up home
loans are usually disbursed within two to three weeks. However, many lenders
now offer instant options with same-day disbursement, though for smaller
amounts.
Inexpensive,
readily available
The
interest rates on these loans are usually the same as on the underlying home
loan (8.25 per cent onwards), or slightly higher. Availing top-up home loan tends
to be cheaper than alternatives like a personal loan, loan against a credit
card, or a gold loan. For borrowers with a home loan, a top-up serves as a good
source of funding to consolidate other higher-cost debts.
Obtaining
these loans is easy, with minimal documentation required. The longer tenure of
these loans can also prove beneficial. If an existing home loan borrower has a
residual tenure of more than seven years, availing a top-up home loan can allow
her to secure a bigger loan amount with a lower EMI than other loan
alternatives.
Keep an eye
on your budget
The easy availability
of these loans can lead to overspending. The biggest risk of top-up loans is of
home buyers exceeding their budget.
Using these
loans for consumption and speculative purposes can also be risky. If the
borrower cannot repay the loan due to lack of income or losses from speculative
activities, they risk defaulting on it. This could lead to the bank seizing the
property.
Mind the
end-use
Many lenders
offer a top-up home loan at the time of balance transfer. Borrowers who are
unable to secure a top-up home loan from their existing lender, or are asked
for a higher interest rate, may opt for a balance transfer and avail a top-up.
After RBI’s
warning, borrowers should be cautious about end usage. Top-up loans on property
are typically meant to fund home improvements. They can also be used for their
purposes, such as education or medical expenses, provided this is specified at
the time of borrowing.
Having a
budget for home improvements and interiors and sticking to it.
Customers
seeking funds for a vacation or consumption-related purchases should avoid
using a top-up loan. Choose a loan specifically designed to fund consumption
rather than put your home at risk.
Key factors
to consider when choosing term insurance plan
For many Indian
families, a term insurance plan serves as a cornerstone of financial planning.
However, choosing a right term plan is a challenging task. Here’s what to
consider:
COVERAGE
AMOUNT
Determining
the right coverage amount is crucial. The sum assured should be sufficient to
meet family’s financial needs in your absence.
CLAIM
SETTLEMENT RATIO
The claim
settlement ratio is important for indication percentage of claims an insurer
has successfully settled.
PREMIUM
AMOUNT
Affordability
is vital when selecting a term insurance plan. Premium should be manageable
within our budget while still providing adequate coverage. Premiums are
influenced by age, heath, lifestyle, and coverage amount.
RIDERS AND
ADD-ONS
Many insurers
offer additional riders or add-ons that can enhance term insurance coverage,
accidental death benefits, and waiver of premium in case of disability.
Before finalizing
your purchase, thoroughly read the policy document. Understanding the terms,
conditions, and exclusions is vital to avoid any surprises.
STICK TO
LTV LIMIT, AVOID LONG TENURES
- Take this loan only to fund mandatory expenses on interiors and home improvements
- After RBI’s warning, don’t exceed the RBI-mandated LTV limit (75-90 per cent, depending on loan amount) on home loans
- Limit the tenure of top-up loans to two to four years
- Despite the lower interest rate on top-up home loans, total interest outgo will rise if you select a longer tenure
For More Details: Pooja Manoj Gupta, visit www.giia26.com
Email: pmgiia26.com Mobile 9868944340
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