I own a house which is quite old and needs renovation. The cost of renovation is quite steep and I am confused between opting for a personal loan or home improvement loan. Which is a better option in my case? Also how to apply for a home improvement loan?
Home improvement loans are specially designed for people needing funds towards house maintenance and repair. Considering you have a good repayment history and a good CIBIL score you can opt for either a home repayment loan as well a personal loan depending on the amount of money you require.
Since personal loans charge a high rate of interest compared to home improvement loans, they should be taken only when absolutely necessary. What’s more, in case you have already taken up a home loan, the same bank may give you a preference for home improvement loans. The interest paid on the home improvement loan is tax deductible up to Rs 30,000 under section 24 of the income tax act making home improvement loans a better option than personal loans. Home improvement loans are available for all renovation and repair work like painting, flooring, extending a room etc and not applicable for purchase of furniture or consumer durable goods.
In case you are considering applying for a home improvement loan with a bank, you need to get a rough estimate of the construction or renovation work. The rough estimate along with the details of the construction or renovation work you plan to undergo must be submitted with the bank along with the loan request form. The bank verifies the estimated values for renovation work and gives money directly to the contractor in case the home improvement loan is approved.
A home improvement loan is same as a Home Loan and might be cheaper than taking a Personal Loan. If you already have a Home Loan running, consider getting a top-up on your Home Loan. This loan is cheaper than a Personal Loan and it makes you eligible for tax benefits as well. But, applying for a top-up loan does not necessarily mean you will receive it. Banks will consider your repayment ability, among other things, before sanctioning a top-up loan.
Keep in mind the following two conditions before applying for a top-up loan:
You have to get the top-up loan from the same bank which sanctioned your Home Loan.
Banks offer top-up loans 6-12 months after disbursing the Home Loan and only if you have made your EMI payments on time.
These two basic terms are considered by all banks before disbursing these loans. But there maybe be additional factors considered by banks to determine your eligibility for one.
How much top-up loan can I get?
You can get a top-up loan for an amount equivalent to 70%-75% percent of the market value of your property, minus the Home Loan amount outstanding. To explain this with an example:
The market value of your property at the time of the top-up loan application is Rs. 40 lakhs. 75% of your house value is Rs. 30 lakhs. You have an outstanding balance of Rs. 25 lakhs on your Home Loan. This will qualify you for a top-up loan amount of Rs. 5 lakhs.
Sometimes, banks cap top-up loans so that this amount plus the outstanding amount on your Home Loan stays within the original sanctioned amount of your Home Loan. For example, if your Home Loan was sanctioned for Rs. 40 lakhs and your outstanding is Rs. 25 lakhs, the maximum top-up loan you can get is Rs. 15 lakhs. This will keep the total loan amount, at any point, within the Rs. 40 lakh range.