Is Top Up Home Loan Better Alternative Than Gold Loan or Personal Loan?

Is Top Up Home Loan Better Alternative Than Gold Loan or Personal Loan?

A top up home loan or a home extension loan is an additional loan amount given by the bank/NBFC over your existing home loan. So, if you have any requirements such as repair and renovation on the property for which you have an ongoing housing loan, then a home loan top up is an option. Funds from this loan can be used for other purposes as well, such as financing business operations, sponsoring your child’s higher education, etc. If the current lending institution does not wish to provide a top-up facility, then you can choose a balance transfer to another bank and NBFC that offers this service. 

Many people however consider other financing options than top up home loans, such as personal loans and gold loans, but how viable are these against a top-up loan? Below, we have discussed and compared different aspects of a top-up home loan vs. a personal loan, and a loan against gold, so that you can make a right pick.

Home Top up Loan vs. Personal Loan and Gold Loan

Here is a clear distinction between the above-mentioned loan types, so that you can weigh the options and choose the ideal one.

  • Loan Amount:

The home loan top-up amount depends on the LTV (loan to value ratio), which is determined by the bank/NBFC. Usually the LTV for such a loan is up to 75% of the current market value of the house. The LTV is similar in case of funding against gold jewellery and coin, but the weight and purity of gold also accounts to determine the applicable LTV. In case of a personal loan, the quantum of finance can go up to Rs. 25-40 lakhs and in some cases up to Rs. 1 crore, while a gold loan can go up to Rs. 5 crores to Rs. 10 crores.

To choose any of the above-mentioned loans, you need to be sure about the amount of funds you need, and then take a decision accordingly. If the amount is just a few lakhs, then any of the alternatives will do. But, if the amount is in crores, then you have to strictly compare the loan offers with high quantum of finance, and select the one wisely.

Also, to qualify for a loan against gold amounting to a huge loan amount, you must possess equal value gold, in fact more, because the LTV on gold asset is up to 75% only if the gold is about 22 carat. The current value of property and the amount of funds you can avail on the house, can give you a clearer idea as to which loan type to select.

  • Loan Tenure:

The tenure of a home extension loan depends on the remaining tenure on your existing home loan. For instance, the tenure of the housing loan is 20 years, out of which the initial 5 years are already gone by then the remaining tenure is 15 years. In case you apply for a home top-up loan, then the tenure of it can be up to 15 years. Other factors, such as your credit score, existing financial responsibilities, debts and outstanding dues are also taken into consideration.

A personal loan comes with 2 to 5 years tenure; whereas a gold loan carries tenure of up to 2 years only. So for a long-term funding, a top up loan is ideal. Do note the implication of tenure on the cost of loan overall, before picking the right financial product for funding. For instance, the longer the tenure, higher the interest payout because you have to pay the interest amount on additional tenure. On the other hand, a shorter tenure will make the loan a little less costly because you save on the interest payment on additional tenure.

  • Interest Rate:

The home loan top up interest rate is 0.5% to 1% higher than the existing housing loan rate. Home loan rate of interest starts as low as 8.35%, thus rate on top-up funding will be comparatively lower as well. Gold loan interest rate on the other hand, starts from 10.50% to 11%. Personal loan rate starts from 10.99% and can go up to 26%. So, a top up loan can be less costly compared to the other two loans mentioned, and you can use the funds from the same to pay off loans with higher rates of interest as well.

Financial institutions determine the rate of interest based on several factors such as your income, the value of the asset in question, your repayment capacity, age, tenure of the loan left (in case of a top-up funding), personal credit score, and other aspects.

  • Time Taken to Process the Loan:

If you take a top up home loan, it can take up to a week to process the loan application. This is because a prior verification of documentation and valuation of the property price and condition in the current state is necessary before the loan amount is finalized. But in contrary, a personal loan can be processed within as little as 48 hours to 72 hours.

A loan against gold is the quickest to process, as it can take up to a day to get done with the formalities, i.e. the documentation verification and valuation of the gold asset. Disbursal happens the same day of the loan approval in case of a gold loan

If you are not in immediate need of the funds and can wait till a week or so, then choose a home extension loan than the above-mentioned two options, as the risk based will be on the existing property, and not the gold jewellery or your monthly income as in case of a personal loan.

  • Tax Benefits:

Under the Income Tax Act of India, principal and interest paid on personal loans and gold loans do not account for any tax benefit. But in the case of a top up home loan, you can get tax benefits on both the principal payment and the interest paid, as per the usage of the funds. If you utilize the loan amount for home repair or renovation, alteration of property, or extension of the house, then the interest paid is viable of tax deductions under the Section 24B.

Also, if the funds are taken to purchase a new property or construct a new house, then the interest and principal repaid are both eligible for tax benefits under Section 24B and Section 80C, respectively.

To Conclude

A top up home loan is the most viable option if you need to borrow additional funds for the construction, alteration, and other renovation purpose of the same property on which you have an existing home loan. But, at times, a personal loan or a gold loan may seem helpful, if you are in urgent need of funds, or these loan offers have a better term and condition compared to a home top up loan.

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