You may be repaying your home loan comfortably, but life doesn’t always stick to the plan. Unexpected medical bills, a sudden business need, or expenses like your child’s education may crop up. In such situations, you might look for extra funds. That’s when two choices usually come up — should you take a personal loan or request a top-up on your existing home loan?
Though both options help you borrow quickly, they are not the same. The differences lie in paperwork, interest rates, repayment time, and even the cost over the long run. Let us break it all down, so you can decide which one works better for you.
A top-up home loan is simply extra borrowing on top of your current home loan. The same bank that gave you the original loan may offer it to you, especially if you have been paying your EMIs regularly. Since you are already a customer, they have your profile on file. Your income, credit score, property documents — everything has already been checked. All the home loan documents required were also submitted earlier, so you are not starting from scratch.
Because your lender already knows your repayment behaviour, approvals usually happen quicker. More importantly, since your house serves as collateral, banks offer a lower home loan rate of interest on top-up loans compared to personal loans. That is one of the biggest reasons why many borrowers lean towards top-up loans.
While both serve the same purpose — giving you quick access to funds — the way they work is quite different. Here’s how:
● Interest rate: Top-up home loans usually come with interest rates that are close to your ongoing home loan. This makes them much cheaper than personal loans. Since personal loans are unsecured, lenders charge much higher rates to cover the risk. The gap between the two can easily be several percentage points. Over time, that makes a big difference.
● Tax advantage: If you use your top-up loan for home repairs, renovation, or expansion, you may be able to claim tax deductions. That is not always possible with personal loans. Your bank may ask you to submit the home loan documents required that prove how you have used the funds.
● Loan tenure: Personal loans give you 1 to 5 years to repay. That is not always enough if you are borrowing a large amount. A top-up loan, however, often lets you repay over a much longer period; sometimes as long as your remaining home loan tenure, which could mean 15 or even 20 years. Lower EMIs are easier on your pocket.
● Processing time: When you apply for a personal loan, you usually need to submit fresh income proofs, address proofs, ID documents, and salary slips. Then comes credit checks and eligibility assessment. However, for a top-up, most of the home loan documents required are already with the lender, which speeds up processing significantly.
● Paperwork: Personal loans involve fresh documentation every single time. With top-up loans, you don’t need to resubmit all your papers. Your lender may only ask for updated salary slips or bank statements. Since your identity, employment, and property papers are already verified, there is less hassle.
Let us quickly look at why a top-up home loan often works better than a personal loan:
● Easy process: The paperwork is light because your lender already holds the home loan documents required. You don't need to run around gathering everything again.
● Lower rates: The home loan rate of interest offered on a top-up is usually much cheaper than any personal loan rate you will get in the market.
● Higher loan amount: With an increase in your property’s value and a clean repayment history, you may qualify for a larger amount than you would with a personal loan.
● Longer tenure: You get years, even decades, to repay the top-up loan, unlike personal loans, where repayments finish in just a few years.
● Faster disbursal: Many banks allow top-up applications online, where the money is credited within a day or two since the home loan documents required are already with them.
● You should have made regular EMI payments for at least 12 to 24 months. Banks check this first to ensure you have been consistent with your repayments.
● The total outstanding amount, including your existing home loan and the top-up, generally cannot exceed 75% to 80% of your property’s current market value. This ensures that the loan stays within safe lending limits.
● Your income level should comfortably support the revised EMI amount after the top-up. Lenders may review your current salary or business income before giving approval.
● Most of the home loan documents required are already with your lender. In most cases, they may only ask for a few recent documents like salary slips or updated bank statements.
● Your property papers, original loan documents, and KYC records — the key home loan documents required — must be valid and updated to avoid processing delays.
If you already have a home loan and qualify for a top-up, it often makes far more sense than going for a personal loan. The lower home loan rate of interest, easy eligibility, and longer repayment period make it easier on your finances. Since the bank already has the home loan documents required, you also save time and effort.
Personal loans, however, have their own use. If you don’t have an existing home loan or if you need funds urgently and your lender is not offering a quick top-up, a personal loan may still serve your immediate need. At the end of the day, it is always wise to compare both options carefully before deciding.
Disclaimer: This article is published in association with Bajaj Finserv and not created by TNM Editorial.