Over-leveraging with top-up loan can put your home at risk

 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.

How do these loans work?

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