Top-up home loan is cheaper than other personal loans
A home loan, being a secured loan, is known to offer one of the lowest interest rates to retail borrowers. The situation doesn’t change much when it comes to a home loan top-up. “Top-up home loans typically have lower interest rates than other types of loans like personal loans, which can help you save money on interest payments over time,” says Shetty.
The interest rate for a top-up home loan may be marginally higher than that of a regular home loan, but it is still much cheaper than most of the other loan options. While the lowest home loan interest rate in SBI for a new term loan is 9.15%, you can top-up the term loan at 9.55%.
Doesn’t need effort like new home loan
Getting a home loan top-up is quite easy. “Since a top-up home loan is secured against your existing property, you do not need to provide any additional collateral, which means that you do not need to pledge any other assets as security,” says Shetty.
It has fast processing and quick disbursal
As a home loan borrower already has an active loan with a lender, the lender has most of the details of the borrower. So the loan can be processed faster. “Top-up home loans are usually approved quickly because the lender already has all the required information about the property and the borrower,” says Shetty.
You get tax benefit on top-up home loan as well
Repayment of the top-up home loan is also eligible for income tax deduction benefits. “If you use the funds from a top-up home loan for home improvement or renovation, you may be eligible for tax deductions under Section 24 of the Income Tax Act. The interest paid on the top-up loan is also tax deductible if the funds are used for renovation or improvement of the property. Section 24 allows home buyers to deduct interest payments up to Rs 2 lakh on their home loan,” says the CEO of Bankbazaar.com.
Also Read: Prepay this much of your home loan to save Rs 17 lakh interest
Lower deduction for self-occupied house
In case of self-occupied property the maximum deduction available on repayment of interest of a top-up home loan is of Rs 30,000. This deduction is under the overall limit of Rs 2 lakh.
Higher deduction for let out house
In case of a let-out property, you can get unlimited deduction on interest payment of a top-up home loan. However, there is an annual set-off limit of Rs 2 lakh against other heads of income. Any interest payments over Rs 2 lakh in a financial year can be carried forward up to eight years.
Deduction of principal amount only on new property
If you utilise the funds for the construction or purchase of a new property, the home loan repayment of principal and interest will be eligible for deduction under Section 24(b) and Section 80C, respectively. However, no deduction can be claimed on the principal repayment if the funds are used for repairs, renovation or alteration of the property.
There may be some change with regards to taxation. “The budget proposes a change — while interest paid on borrowed capital for acquiring or improving a property can, subject to certain conditions, be claimed as deduction from income, it can also be included in the cost of acquisition or improvement on transfer, thereby reducing capital gains. It is proposed to provide that the cost of acquisition or improvement shall not include the amount of interest claimed earlier as deduction. This will come into effect from April 1, 2023, and more clarity will be known thereafter,” says Shetty.
Also read: 9 hard lessons for home loan borrowers from the sharp interest rate hikes
No tax benefit if funds are not used for home improvement or renovationAll the tax benefits on top-up home loans are subject to how you use the funds. “Tax benefits are only available if the loan is used for renovating, repairing an existing house, or purchasing a new property, but not for personal reasons,” says Swaminathan.Top-up option starts once your home loan is one year oldMost existing home loan borrowers would be eligible to get a home loan top-up. Swaminathan says that homeowners who have completed at least 12 monthly installments of their home loan can qualify for the top-up loan.Better suited to people whose home loan-related tax deduction utilization has fallen
Though most borrowers can get a home loan top-up, it works best for old borrowers who have seen their taxable income rise over a period while their home loan deduction utilisation has fallen due to a reduction in home loan outstanding and annual interest amount. So if your annual interest payment has come down well below Rs 2 lakh, you can very well use a home loan top-up to save more taxes. This works best for people in the highest income tax bracket as the tax benefit helps you significantly reduce the net cost of borrowing.
Don’t go overboard
Use a top-up loan only when you really need funds. “Whether it is advisable to use your investment funds to cover personal expenses or opt for a top-up loan solely for tax benefits depends on your repayment plan and the intended use of the loan amount. If you are already spending over 60% of your income on EMIs, taking out another loan to gain tax deductions may not be beneficial,” says Swaminathan.
While taking a loan, you must have the capacity to repay it. Shetty says it is essential to remember that taking a home loan top-up also means taking on additional debt. “It may not always be the best financial decision. Before deciding whether to go for a home loan top-up, you must carefully consider your financial requirement, home renovation budget, and overall financial situation to easily repay this loan. It is a useful product, but you must only take it if you are confident about your income, employment stability and repayment of the loan in the tenure you are going to choose,” he adds.