Personal Loan or Top-up Home Loan: Which is cheaper?

If you have an existing home loan, you can take a top-up loan on it, just like you top up your mobile phone and your balance gets updated. Similarly, you can top up your home loan. This will be an additional loan on top of your existing home loan.

Banks offer top-up loans by considering these factors. Increased market value of the property, the track record of repayment you have made on your existing home loan,  your ability to repay, which is called the repayment capacity.

You can use a top-up home loan for carrying out repair works, renovations, interior designing, and more. One of the significant advantages of a top-up home loan is that it gives you the flexibility to use the loan amount for various purposes such as education, weddings, medical bills, and personal expenses. In this regard, it’s similar to a personal loan.

A top-up home loan typically has a longer tenure, just like a home loan. Its tenure can extend  up to the remaining tenure of your existing home loan which can be even up to 30 years.

The top-up home loan from State Bank has a tenure of up to 30 years, while ICICI Bank offers a top-up loan for up to 20 years. As a result, top-up home loans are relatively cheaper compared to personal loans.

The interest rate on a top-up home loan is slightly higher than a regular home loan but lower than that of personal loans or credit card loans.

Security in the form of your property is the main reason. The loan is provided against the value of your property.

According to SBI’s website, the initial interest rate for a regular home loan is 9.15%, while the interest rate for a top-up home loan starts at 9.55%. On the other hand, State Bank of India’s personal loans have interest rates ranging from 11.05% to 14.05%. Credit card loans usually have even higher annual interest rates, often exceeding 24%.

From this viewpoint, top up loan is way cheaper than personal loan. Repayment of the top-up home loan also comes with an income tax benefit. If you use the loan amount for home maintenance or renovation, you can claim a tax deduction of up to 2 lakh rupees on the interest under Section 24 of the Income Tax Act. However, personal loans do not get any tax benefits.

The market value of the property plays a significant role in obtaining a top-up home loan. If the property’s value has not increased substantially or does not meet the bank’s criteria, you may not be able to borrow as much as you want. For individuals who want to carry out work on their property or similar purposes, a top-up home loan is preferable to a personal loan. It typically offers lower interest rates, a longer tenure, and tax benefits.

It’s essential to keep in mind that a top-up loan is secured against your property. In the event of default, your property can be seized. Therefore, you must ensure that you can comfortably repay both EMIs before considering a top-up home loan.