Which is the better option between a home loan top up and a personal loan? This question might concern a majority of the population. So let us compare the two financial options and check out which of the two is a more feasible option.
What is a Top Up Home Loan?
A top up home loan is an additional loan facility given to existing home loan borrowers to carry out home renovations, repairs, etc., to the existing house. This loan is available to borrowers maintaining an impeccable repayment record. It is a secured loan with the equitable mortgage of the home covering the additional top up home loan facility, as well. Almost all public sector banks and private sector banks offer home loans top up, such as Federal Bank Home Loan. Similarly, housing finance companies also offer such facilities, like Indiabulls Home Loan.
What is a Personal Loan?
A personal loan is a clean and unsecured loan offered by almost all banks for meeting personal exigencies. It could be a medical emergency or a marriage in the house. It can be for home renovation or pursuing higher education. The banks generally do not ask for the purpose of the loan but stipulate conditions that the borrower should not use the funds for unlawful activities. This loan also requires the borrowers to maintain an excellent repayment record.
With the definitions out of our way, here are some points to consider that could help you decide the better option.
Interest Rate
A top up home loan is an extension of the home loan. As total security is available for the loan, the interest rate equals the home loan or is slightly more. On the other hand, the personal loan is an unsecured facility. Therefore, the risk perception for the banks is high, leading to a higher interest rate than the top up home loan.
Thus, a top up home loan is a better option, especially if you need the funds for home renovation.
Repayment tenure
The top up home loan has an extended tenure that could be anywhere from five years to the residual tenure of the existing home loan. Generally, Federal Bank Home Loan or Indiabulls Home Loan spaces out the repayment tenure of the top up home loan to coincide with the residual repayment tenure of the home loan. Hence, you have a lower EMI liability. In contrast, the personal loan has a maximum repayment tenure of five years.
Considering the higher interest rate and fewer EMIs, the EMI amount could be substantially higher than the top up home loan EMI. However, the benefit is that you liquidate the personal loan liability quickly than the home loan top up.
Tax Benefits
A top up home loan is similar to a home loan for taxation purposes. Hence, the benefits available on the home loan extend to the home loan top up, subject to the respective ceilings under various sections. Generally, the personal loan does not get such taxation benefits. However, some banks like HDFC Bank Personal Loan for house renovation. The repayment of such loans can be eligible for tax concessions on producing a certificate from the bank regarding the end-use of funds.
The home loan top up is a better option than the personal loan in the taxation aspect. Availability of security
The equitable mortgage available with the bank gets extended for the top up home loan. It affects equity. Hence, the borrower must necessarily liquidate the home loan and the top up facility while selling the house. There is no security available to the bank in a personal loan. Hence, you can sell off your property without adjusting your personal loan.
Under such circumstances, the personal loan seems to be a better option than the top up home loan.
Here is a comparison between the pros and cons of the top-up home loan and personal loan to help you decide on the better option.
Advantages of Top up Home Loan vs. the drawbacks of Personal Loans
| Top Up Home Loan | Personal Loan |
| It is available at lower interest rates than personal loans. | The interest rate on personal loans is higher than the home loan top up rates. |
| The repayment tenure can extend up to the residual home loan tenure, resulting in lower EMI amounts. | The maximum repayment tenure is 60 months. |
| Tax concessions are available on the home loan top up similar to that of the home loan. | No tax concessions are available on personal loan repayment. However, there are certain exceptions. |
| As the customer already has an existing loan facility with the bank, it becomes easier for the banks to process the top up home loan. | The personal loan approval process is quick, but the applicant should have a perfect repayment record and a high credit rating. |
| The borrower does not have to produce new KYC documents. However, the bank will call for the latest income documents to determine
the borrower’s capacity to repay the home loan and the additional top up facility. |
If the customer does not maintain an account with the respective bank, the documentation formalities are more because of KYC requirements. |
| The borrower has to provide additional documents to prove the end-use of funds for home renovation, repairs, and maintenance alone. | The personal loan also entails the applicant providing income documents. However, there is no need to disclose the end-use of funds. |
Benefits of Personal Loans vs. the disadvantages of home loan top up
| Top Up Home Loans | Personal Loan |
| The top up home loan is available for specific purposes. | The personal loan does not have any such restrictions. |
| If the home loan and the top up facility exceed the original home loan sanction, the borrower has to extend the mortgage and register it accordingly (if applicable). In addition, it can result in payment of stamp duty and registration charges. | A personal loan does not have such expenses. |
| Instant home loan top up facilities are not available because the applicant has to submit documents to prove the requirement. | Instant personal loans are available with a few clicks. |
Final Words
The above comparison should help you decide on the better option between the top up home loan and the personal loan, depending on the purpose of the loan. For example, if the purpose is for house repairs and maintenance, it is always better to go for a home loan top up. Otherwise, a personal loan is a viable option.
