NEW DELHI: Simmi (Name changed) had purchased her property two years back, which she had rented out while still staying in a rented home at West Delhi. But then came Covid and with the salary cut, this was not financially viable. So, she decided to move to her own flat at Indirapuram, but wanted to customise it as per her needs.
A close observation suggested that it required waterproofing, painting, kitchen needed to be redone, and electrical wiring needed to be replaced. After getting an estimate, the cost came up to around Rs 7-8 lakh. But how to finance it was the real question and a challenge for her as she was already paying EMI of Rs 38,000 per month.
Friends suggested she go for the top-up loan with her banker the State Bank of India. “I applied for the loan but it was tougher than going for home loan. Despite no defaults for the last two months, and after filling multiple documents, it took one and half months to get my home valuation done, to which the bank said that it is valued at a lower price, so my loan eligibility will be lower. Despite giving proof of all the online payments done to the home decor company, they asked for the registered architect to give an estimation on their letter pad, which the company refused as they claimed it is all digital. They gave an email statement from their registered mail. My savings had been exhausted and I was in a financial mess,” Simmi added.
After being harassed, they applied to HDFC Bank, only to repeat the same process and go through the same struggle with another rider which said she can get a loan only when Ghaziabad Development Authority will give the go ahead. This meant another two months and no option other than to go in for a personal loan, at 12% monthly interest.
As work from home is keeping more people at home tempting them to go for home renovation, it is critical to plan in advance, from how much renovation is required to deciding on how much to pay and, above all, how to finance it.
Stick to your plan
“Most of the time people start with redoing a part and then they end up doing the whole home. So deciding what needs to be done, how much they are ready to spend and then sticking to the plan is must. Once they stick to it, the financing instruments can be decided depending on the cost. Also keep an upside margin of 10%,” Sejal Shah, a Mumbai-based personal finance expert said.
However, she advises against taking it out from small savings or to go for a personal loan. “I never advise any of my clients to go for a personal loan if budget exceeds Rs 5 lakh, especially for the salaried class with annual income less than Rs 15 lakh. They can go for a personal loan only if they have a salary at higher bracket and their overall EMI burden stays within Rs 40,000 per month. This is conservative yet a prudent way, “ Shah added
Top-up Vs Renovation Loan
“Top-up loan is a really good option as interest rates are close to your Home loan and you can sync it with your EMIs but then you have to keep a timeframe of at least two months in mind before you go for it. The home loan must be 24 months old with no record of default. Whatever they claim initially, from applying to property evaluation to getting money finally reimbursed, it takes a minimum of two months, depending on your bank,” Sanjay Goyal, a senior banker said.
Home renovation loan is also an option but one of the problems is getting the bills. As the construction market still remains largely unorganised and prefers cash, getting a proper bill from the mason to carpenter is practically a challenge. Even if some of them agree to give the bill, they will ask for 18% extra and thus upset your whole budget. One can still go for it if they hire a registered architect, who can agree to produce all bills to the satisfaction of their bank.
Top-up Loan versus Personal Loan
You can be entitled for tax benefit in case of a top-up loan, with some riders. However, there is a ceiling for that.
There is a huge difference in rate of interest for top-up and personal loan. For instance, if your home loan is at 6.70%, top-up loan will be 7%, while the personal loan will vary between 11.5 to 12.5%.
A top-up loan is offered to existing home loan customers, while a personal loan can be availed by anyone.
Top-up loans have flexible tenures, compared to personal loans. Mostly, the remaining tenure on an existing loan is set up as the top-up loan tenure.
How to apply for top-up loan
You have to approach the same lender for the top-up loan, who has your home loan account. You should not have any default.
You give them all documentation, including property papers, permission from the concerned development authority and estimation of cost. Once it is processed, your property will be re-evaluated and a top-up loan amount of up to 30% of the existing disbursed loan can be availed.