Top UP Home Loans-considerable heat-but, but not all the sweet miles! In response, Reserve Bank of India (RBI) Governor Shaktikanta Das has raised red flags on the rapid expansion of these loans and warned some lenders are not fully adhering to LTV ratios, risk weights, or monitoring end-use of funds. These are all problems and they can spell bad news for borrowers.
A top-up home loan is an extra loan that can be taken from your bank or housing finance company over and above the home loans you already subscribe to. If you have paid your EMIs on time for 18-24 months, even a top-up from the same lender might come with concessions.
For example, this is for the difference between the originally disbursed loan amount and the current unpaid balance. In practice, while these loans can last as long until there are 20 years or so left on your home loan term, most limit them to a maximum of 15 years. These loans generally take two to three weeks for disbursal, although some lenders are now providing the option of instant disbursals (for lower ticket sizes).
A top-up home loan's interest rate is also relatively lower than personal, credit card-led, or gold loans. Top-up loans also come with similar or marginally higher interest rates than those on your home loan, making it a cost-effective way of consolidating high-cost debts.
These loans, moreover can be availed without much of any documentation VIOLATION as they are minimal documentation. Topping up is available to borrowers who have more than 7 years of residual home loan tenure bestowing a higher loan amount at lower EMI from other types.
But that is why the ease and cost-effectiveness of top-up home loans can lead to a situation of over-leveraging. The easy access to money may lead people into borrowing more than they can afford or using the loan on unnecessary composition. It could even be a dangerous scenario, especially when the money is spent on consumption or betting.
Should a borrower become unable to repay the loan, for loss of income or bad speculative investments then no asset will be necessary and that is just in time as there could be default on those credits occurrences with borrowers having their properties seized by banks at foreclosure auctions. As a result, it is important to consider how the loan money will be used.
These loans are being used as capital for the time being, but one should also be careful when it comes to end-use. In the general sense, top-up loans are to cater for a home improvement but may be used as well catering education or medical purpose when defined at borrowing stage. This does NOT mean taking out loans and going to the stock market or doing other high-risk things;
Setting a budget for any home improvements or interior work is absolutely essential. For borrowers looking at funds for a holiday or other consumption-related outlays, it may be time to look elsewhere rather than betting on their homes by taking on a top-up loan.
While there are several advantages that you can avail of with top-up home loans such as lower interest rates and faster access to funds, they also come at a high price if things turn unpleasant. The loan should be utilized in ways that are within their financial means and requirements, along with practicing caution. If you over-leverage, then it may cause several collateral damages such as unsecured property until paying off.