Top-up home loans work best when repaid quickly; avoid overleveraging
Published by Business Standard
Abhishek Kumar's role: Quoted
Abhishek Kumar said some lenders add a markup of 1-2 percentage points to the home loan rate for top-up loans and noted tax benefits when the money funds renovation. He cautioned against using them for holidays or lavish buys, and suggested keeping total EMIs within 35% of monthly take-home pay.
What Abhishek Kumar said
How much does a top-up home loan cost, and is there a tax benefit?
A top-up loan is usually priced close to your existing home loan, but some lenders add a markup of 1 to 2 percentage points over the home loan rate, so check the rate you are actually offered. These loans can also give you tax benefits if you use the money to renovate your home, which is one more reason to keep them for that kind of purpose.
What goes wrong when people use top-up home loans?
Because the money is so easy to get, borrowers often spend more than planned on improving the home, or worse, use it for exotic holidays, and some even put it into day trading. Many of them end up in a debt trap. So I would not use a top-up loan to pay for holidays or extravagant purchases at all.
How do I stop a top-up loan from overstretching my finances?
Before you borrow, set a realistic budget for the home improvement work and stick to it strictly. Then look at all your loans together, not just the new one: I suggest keeping your total EMI outgo, including the top-up, at no more than 35% of your monthly take-home income, so that the repayments stay manageable.
In our words, from what he said in the piece. General information, not personal advice.
More of Abhishek's views on debt and loans
The article explains top-up home loans, which existing home loan borrowers can take as an additional loan, amid reports that the RBI is watching this segment. It covers eligibility, interest rates, tenure limits, tax benefits for renovation, and the extra interest cost and debt-trap risk when such loans are stretched over long periods.
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Top-up home loans work best when repaid quickly; avoid overleveraging