You have spent years turning your house into a home. From the carefully chosen paint colours to the memories made in each room, your home holds a special place in your heart. However, over time, your needs have changed due to a growing family, and now you wish to make certain improvements to the existing structure and construct a new floor to ensure hassle-free accommodation.
Since the property is already mortgaged under a home loan, you cannot turn to a home renovation loan. The alternative option is a personal loan, but the interest rate might strain your budget. This is where a top-up loan comes in handy.
What is Home Loan Top Up?
A home loan top up is an additional loan that you can obtain on top of your existing home loan, provided you have sufficient equity in your property. This type of loan allows you to borrow against the increased market value of your home since the time you first took out your mortgage.
For example, if you have a home loan of ₹50 lakhs and have repaid ₹20 lakhs towards the principal over the years, and the current market value of your property has risen to ₹1 crore, the total equity you hold in your property amounts to ₹70 lakhs.
As per RBI guidelines, for loan amounts exceeding ₹75 lakhs, the loan-to-value (LTV) ratio must not exceed 75%. Considering the equity available in your home, the maximum top-up loan you can qualify for would be ₹45 lakhs.
Factors Affecting Top-up Loan Eligibility
Five parameters affecting top up loan approval are:
Credit Report
The credit report is the first thing lenders assess when considering your application for a home loan top-up. Your application may be denied if the report has various negative remarks, such as loan defaults, maxing out credit card balances, or incidents of loan settlements. Moreover, if the score on your credit report is below 750, your application could be turned down. Here are some tips to maintain a healthy credit report:
- Avoid maxing out on revolving credit.
- Refrain from submitting multiple loan applications simultaneously to avoid hard inquiries.
- Automate your repayment obligations to prevent EMI skips.
Income and Employment Stability
Lenders want assurance that you have a stable income to repay the loan. If you prefer switching jobs every few months or working for a company with no fixed date for salary credit, the lender might reject your application.
Similarly, if, after obtaining a home loan, you venture into a business that generates revenue only during specific seasons or festivals, the lender will consider you a risky borrower and might reject your loan application.
Existing Loan Repayment History
The way you manage all your existing debts, not just your home loan, significantly impacts loan approval. Even if you are punctual with your home loan repayments but have missed several EMIs on your ongoing car loan or defaulted on credit card payments, the lender is likely to reject your application.
A consistent history of timely repayments reflects financial discipline and reliability, making you appear as a lower-risk borrower to lenders.
Property Valuation
The current market value of your property is directly linked to the amount you can borrow. Lenders usually conduct a valuation to assess the property’s worth before approving a top-up loan. If there is substantial appreciation in the current value of your real estate, expect a higher funding amount.
Repayment Tenure
The tenure of your top-up loan directly impacts your chances of loan approval. For instance, if your funding requirement is high and your income indicates that, after obtaining a top-up loan and paying the EMIs, you would be left with only 5–6% of your monthly earnings, the lender may reject your application. In such a case, if you extend the tenure—which results in lower EMIs—your chances of approval may slightly improve. You can use the EMI calculator or PMAY subsidy calculator for this.
Conclusion
While a home top-up loan offers a flexible financing solution, several factors influence whether you will get approved. From your credit score and income stability to property valuation and loan terms, each aspect plays a crucial role. Before applying for a home top-up loan, assess these factors and ensure you meet the eligibility criteria set by lenders. By doing so, you can increase your chances of securing the funding you need while leveraging the value of your beloved home.
