Is taking a home loan top-up a good option?

1 min read 19 Jun 2023, 10:49 PM IST Raj Khosla

Home loan rates have been rising consistently following the repo rate hikes by the Reserve Bank of India over the past 15 months.

If the prevailing rate of home loans is 8.5%, you will not gain from taking a fresh top-up loan to foreclose the car loan. (iStockphoto)

I pay an equated monthly instalment, or EMI, of ₹55,000 on a home loan obtained at an interest rate of 7.25%. I also have a car loan taken at 8.5% interest and pay an EMI of ₹13,000. Besides, I also have availed of a jumbo loan (one that is bigger than the regular limit and has strict credit requirements) with an EMI of ₹12,000 at 16% interest. The outstanding principal for the car loan is ₹5.5 lakh and needs to be repaid in four years, and the jumbo loan has an outstanding principal of ₹4 lakh that has to be repaid in three years.

I am now planning to take a top-up on my home loan for ₹10 lakh to pay off the car loan and jumbo loan? After closing these two loans, I plan to increase the EMI amount on my home loan from ₹55,000 to ₹80,000. Is this a good option?

—Name withheld on request

Please check the interest rate of your home loan currently. Home loan rates have been rising consistently following the repo rate hikes by the Reserve Bank of India over the past 15 months. Currently, the interest rates of floating rate home loans are upwards of 8.5%. Your home loan rate must have also risen above 7.25% by now. If it hasn’t, it could be because in some home loans, the rate remains fixed for a certain tenure (usually 12-18 months) before it turns into a floating rate loan.

If the prevailing rate of home loans is 8.5%, you will not gain from taking a fresh top-up loan to foreclose the car loan. Yes, it will make sense to take a top-up home loan to pay off the credit card loan that charges 16%. The 7.5 percentage point difference in the interest will bring down the interest cost for you. But do check if there is a foreclosure penalty clause in the loan agreement. Any such penalty will eat into the benefits that might accrue from flipping the loans. Also, factor in the loan processing fee and other charges of the top-up loan.

Prepayment of long-term loans is the best way to deploy surplus money when interest rates are very high. Increasing the EMI of the existing home loan is a good idea. It will progressively reduce the loan tenure and you could be debt free faster.

Raj Khosla is managing director at MyMoneyMantra.com.