ATM :: Which is the best home improvement loan?

Kavya Balaji | Thu, Oct 29 2015. 07 19 PM IST | LiveMint
Choose one based on interest rate, tenor, amount available and also limitations such as prepayment charges


Many owners decide to give their houses a makeover during the end-of-the-year festival season. If you, too, are looking to renovate your house but don’t know how to finance the expenses, you could take a look at the various loans available. Home improvement could include remodeling, painting, internal and external repairs, and even bigger construction work such as adding a floor.

What is it?

Home improvement loan is meant for renovating a house, and is given to a person in whose name the property is. Maximum tenure is typically 15 years and interest rates at present are in 9.5-10.5% per year range, depending on lender, loan amount and eligibility.

“Lenders normally fund close to 80% of the work estimate, which should be related to improvement or extension of the property,” said Rajiv Raj, co-founder and director, CreditVidya, a Mumbai-based credit advice and planning company.

For new customers, higher the loan amount needed, the lower would be the funding by the bank. For instance, at HDFC, a loan request of up to Rs.20 lakh would get 90% funding, if it’s between Rs.20 lakh and Rs.75 lakh, then 80% and if it’s over Rs.75 lakhs, the funding would be only 75%. “For an existing home loan customer of HDFC who wants to make improvements to the same mortgaged property, the loan amount can be up to 100% of the cost of repairs subject to total exposure not more than 80% of the property’s market value,” said a HDFC spokesperson.

The processing fee for these loans generally ranges between 0.5% and 1% of the loan amount.

You get tax exemption for these under section 24(b) of the income-tax Act. The interest paid on home improvement loan is tax deductible up to Rs.30,000 per annum. “Both the owner and co-owner are eligible for tax deduction on the interest paid on such loans,” said said Adhil Shetty, chief executive officer and co-founder, But this exemption comes under the same category as of home loan interest exemption, which stands at Rs.2 lakh.

There are no prepayment charges as “the new guidelines by the Reserve Bank of India (RBI) forbid banks to impose prepayment penalty on such improvement loans” said Shetty.

If you decide to go to the lender where you have an existing home loan, the process is likely to be quicker as required documents would already be with the lender. But your property would act as collateral for this loan.

“In addition to regular income and property documents, an Architect’s Certificate is taken with details of all the works to be carried out,” said Sumit Bali, senior executive vice-president, and head–personal assets, Kotak Mahindra Bank.

For salaried borrowers, the disbursement is also generally fast. “For those with ‘salaried’ profile, it takes 4-5 days from the day of submission of all requisite documents. For those with ‘self-employed’ profile, it takes 7-9 days,” said Bali.

Apart from a home improvement loan, there are some others that you can use.

Top-up loan

This is a loan that can be taken over and above an existing home loan. But it can be taken only after a certain number of years of the home loan being sanctioned. Most banks fix this at over 3-6 years. The interest rate is usually base rate plus a certain percentage. For example, at Bank of Maharashtra, top-up loans are offered at base rate plus 1.25%, which would work out to be 11.5% at present.

The maximum tenure is usually 15-20 years, depending on the tenure of existing home loan. “A top-up loan is almost like a personal loan, except that it comes with lower interest rates,though not as low as home loan rates,” said Shetty.

Most top-up loans are restricted to 70% of the property value. But the actual percentage would depend on the market value of the property and the borrower’s repayment ability. The processing fee is typically 0.5-0.75% of the loan amount.

You can avail tax deductions for a top-up loan also if purpose of the loan is home improvement. “If the loan is for, say, an additional parking space, which is part of property acquisition, the customer will be eligible for a tax rebate on both the principal and interest paid towards the top-up loan. This is included in the rebate she would avail from the current home loan,” said Shetty. Most banks levy no prepayment charges on top-up loans taken by individuals.

Personal loan

Personal loans are among the costliest credits available, as their interest rates range between 15% and 24% per annum. Prepayment charges are also high—2-5% of the principal outstanding. The maximum tenure offered is usually only 5 years, which means the equated monthly instalment (EMI) would be high as compared to loans with longer tenures. The processing fee is also on the higher side—2-2.5% of the loan amount. There are prepayment charges and a lock-in period to contend with. For instance, ICICI Bank charges 5% of principal outstanding as prepayment charge and you need to wait for 6 months before you can prepay. HDFC Bank does not allow part prepayment; foreclosure is available only after 12 months.

While expensive, personal loans are easy to get since no collateral is needed, paperwork is less and disbursement usually takes place in 2-3 days. Some banks also offer special rates to women customers, for example, Bank of India offers 0.5% concession on interest rate for personal loans to women.

Gold loan

If you are not eligible for a home improvement loan or personal loan due to, say, credit history or if the house is not in your name (it may be a family or ancestral property), you could consider gold loans. These are considered as an alternative to personal loans. Disbursement usually takes only 1-2 days, but the interest rate at 14.5-17% per annum is much higher than a top-up or a home improvement loan. With a gold loan, you get only get up to 80% of the value of gold, and the tenure is typically 12-15 months. This means that you need to pledge more gold for higher amounts and pay higher EMIs.

Loan against property

If you have finished paying your home loan, you could consider taking a loan against property (LAP). Even though LAP has better rates and longer tenures than a personal loan, it should be considered only if the amount needed for home improvement is big.

“By opting for LAP, the borrower is mortgaging an expensive asset—the house—for a small amount of loan, and she cannot use the value of the property to obtain any other credit that may be available in the market later,” said Shetty.

There is a limitation on the loan amount that can be disbursed and it may vary across lenders. “Total loan exposure is restricted to 60% of property’s market value for an existing customer and 50% of the property value for a new customer,” said the HDFC spokesperson..

Mint Money take

In terms of cost, a home improvement might be the cheapest and easiest form of credit, followed by a top-up loan. “Home improvement loans score over personal loans or LAP as the interest rates are lower and tenors longer,” said Raj.

If opting for any of these two loans, choose a floating rate over a fixed one as in current conditions, interest rates are expected to move downwards. Only floating rate loans have no prepayment charges.

Ideally, you should save for home improvement and avoid taking a loan. However, if you decide to borrow, remember that a comparison between institutions for interest rates and charges could result in significant savings.

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