Pruning costs

HOME RENOVATION AND TOP-UP LOANS

Competition has brought Indian banks closer to customers. Under a lower-interest rate regime, which unduly favours customers, banks are on the look-out for products which will attract the maximum number of customers.

Home renovation loans are a result of banks' constant efforts to appease the more demanding customers who are not satisfied with regular home loan schemes.

Consider this: you already have a home loan to repay and are also considering giving your home a facelift. A renovation loan appears to be a much more interesting proposition than a personal loan which comes with a huge cost ranging from 14 per cent to 20 per cent.

Renovation loans typically cost 5-6 per cent less than that of regular personal loans. This is because renovation loans are, in fact, a part and parcel of home loans. Most banks today offer renovation loans at the same terms as that of home loans.

Then why are there such few takers for renovation loans? "There still exists a lack of awareness among borrowers or prospective clients regarding such loans," says Harsh Roongta, chief executive, Apnaloan.com, a leading one-stop shop for all kinds of loans.

Besides, some banks are not comfortable giving out such loans mainly due to recovery-related worries. Also, people in India are still averse to being in debt. Any additional outflow of money due to interest payments is regarded unwelcome.

However, these schemes are expected to be in the limelight with the home loan segment picking up. "Slowly yet steadily, people are getting used to this concept," says Roongta.

Banks are also offering top-up loans - which are in many ways similar to renovations loans - to customers who scour for home loans with attractive add-on features.

A top-up loan is given by banks as an additional loan on top of a home loan. Top-up loans come at a cost (interest rate) close to home loans.

Borrowers can use this loan to repay other high-cost debts (credit card bills, automobile loans, etc.) since the interest rates in the case of top-up loans are much lower than personal loans.

For banks, these loans form the best way to pass on benefits of interest rate cuts to customers.

Top-up loans are usually linked to balance transfers. "Top-up loans are just to hold back customers from transferring their home loans to other banks or to attract customers from other banks," says Kapil Wadhawan, managing director, Dewan Housing Finance.

Top-up loan schemes are used more as a customer-acquisition strategy than as a product in itself.

For instance, say Mr X has taken a home loan from bank A. After a few years another bank, bank B, offers the same loan at a lesser rate of interest. It is now attractive for X to shift his loan from A to B. B immediately offers him an amount to be paid back to A (and get the house property papers).

B also offers X a top-up loan. The rationale behind this is simple: when X goes to A to repay his loan, A will offer to reduce the rate of interest (no bank wants his customer to leave), making itself at par with B.

Bank B, who has done all the running around to get X under its fold, will lose out. Thus, by offering a top-up loan to X, B ensures that X sticks to its loan scheme (since top-up loans ride on the back of mortgage security). The same applies for A, too.

When A sees that B has cut rates or is about to, it will immediately offer top-ups to all its customers at attractive rates, which will help it retain its customers. As A and B get in to an interest-rate slugfest, X avails of an attractive, lower-cost home renovation loan.

The eligibility criteria for top-up loans differs with different banks. It usually depends on the record of the borrower as regards to payment of EMIs. It also depends on the loan-to-value ratio of the house property under consideration.

For instance, let's assume the value of a property while applying for a loan is Rs 100 and the bank disburses 90 per cent of the amount as loan.

In the next two years the value of the property appreciates to, say, Rs 120. Accordingly, 90 per cent of the value becomes Rs 108 - i.e. Rs 18 over the previously disbursed loan.

This amount can be availed of as a top-up loan. But in general banks have a limit for the amount to be disbursed and loan amounts do not exceed these prescribed norms.

The maximum deduction on interest customers can avail of in case of renovation or top-up loans is Rs 30,000 (whether self occupied or rented).