Top-up home loans can cost less—but read the fine print

Negotiate smartly, as lenders may charge higher premiums on interest and processing fees

- Aprajita Sharma

Personal loans are among the costlier forms of borrowing. Yet, many turn to them during a financial crunch, overlooking a smarter alternative: top-up home loans.

A home loan is typically the cheapest borrowing option in terms of interest rate. If you already have a home loan, you can apply for a top-up loan for any purpose, often at rates only slightly higher than your existing home loan.

But beware: While some banks charge just 0.25-0.5% extra, others may quote a much higher premium, making negotiation essential.

Pune-based Nishant Chalasany was only charged 0.25% higher than his home loan rate on the top-up loan. "They did quote me 0.5% higher than the home loan rate, but my repayment schedule and credit rating were quite good. We negotiated and got it down to 0.25%," he said.

Mumbai-based Ravi Muthreja had a bitter experience. The bank quoted a 1.5% higher interest than his home loan rate, which was 7.4%. "I negotiated for over a month, but they reduced it only by 30-40 basis points. This is despite my track record of timely payments and a credit score of 750+. I am still trying and exploring other banks," he said.

Lack of standardization

The rules on top-up home loans vary across banks. "The RBI has not defined any set parameters as it has for home loans. A borrower must compare interest rates and other charges thoroughly across banks instead of settling with the bank that has their home loan running. One can easily transfer the home loan balance to other banks to get the top-up amount at a lower rate," Ankit Bagadia, associate director at credit card issuer BankBazaar, said.

You need to pay processing charges and stamp duty as well. "It could be up to 0.25% of the top-up loan amount, with a cap on minimum and maximum fees. The stamp duty varies across states. It is 0.3% of the top-up loan amount in Maharashtra," said Sameer Shah, founder, JSK Finsol, a loan advisory firm.