I have a home loan and want to start a business. Should I top up my home loan or take a business loan separately?

I am paying off a home loan taken from a private bank and I am looking for additional funds to start a business. Should I opt for a top-up on my home loan or take a separate business loan? Please advise.  

Name withheld  

Reply by Akriti Singh, Chief Alliances Officer, India Mortgage Guarantee Corporation (IMGC)  

A home loan top-up is an efficient source of additional borrowing when an individual requires funds at a reasonable interest rate. An existing home loan customer should be able to get a top-up approved fast provided the payment of the EMIs (equated monthly instalments) has remained consistent during the loan period. It will also require much less paperwork than other formal borrowing formats as the lender has an existing relationship. Further, the interest rate on such a loan should be broadly at the same rate as the home loan up to the original home loan amount.   

Hence, the three reasons to consider a top-up to a current home loan are:  

1) Time frame of the requirement  

2) Lesser paperwork  

3) Lower rates  

Since it is a running loan with secured collateral, most lenders provide top-ups with ease and after evaluation of your income papers and a property visit. The time required for processing is significantly lower, and chances of approval are higher (provided timely repayment and good scores).   

The top-up amount would be limited to a proportion of your property value or income.   

The interest rate for a top-up would be higher than your current home loan, as the end use is not toward home improvement (or) renovation of your existing home. However, top-up comes with a significantly lower cost of borrowing than other options in the market.  

It is advisable to speak with your home loan lender to understand the formalities for applying for a top-up on your home loan.  

(Views expressed by the investment expert are his/her own)