The Ultimate Guide to Home Renovation Loans

For many of us, a home is more than just a shelter; it represents an emotional investment and reflects our personality. Therefore, most homeowners renovate it after a few years. Renovating a home also helps in increasing the resale value of the house and the owner’s net worth. However, home renovation expenses can be exorbitant, making it unaffordable for many. Even minor changes or improvements can come at a high cost. While it is best to pay in cash for home renovation work, it is not always possible for everyone. Luckily, home renovation loans are readily available nowadays, which means you don’t have to wait to accumulate sufficient funds before renovating your home. This article explains all you need to know about Home Renovation Loans and whether it is worth it.

What is Home Renovation Loan?

As the name suggests, a Home Renovation Loan or Home Improvement Loan is a type of loan taken specifically for home renovation purposes, typically from the same lender from whom the Home Loan is availed. There are various forms of financing that can be used as a Home Renovation Loan, such as Personal Loans, Top-up Home Loan, Home Equity Loans, and Home Equity Lines of Credit (HELOCs).

What Are the Eligibility Criteria for a Home Renovation Loan?

To apply for a Home Renovation Loan, you can either apply individually or jointly. If your home is co-owned, all owners of the property must apply for the loan. However, in case your family members are not co-owners of the property, they can still become joint applicants for the loan.

What Are the Benefits of Taking a Home Renovation Loan?

Since there has been an increased awareness about Personal Loans among consumers over the last few years, many homeowners see Personal Loans as the only quick and easy financing option. However, when it comes to renovating a home, there are several benefits of home improvement loans that make them an attractive option to consider. Here are the key benefits of availing of a Home Renovation Loan:

1. Lower Interest Rate:

While you can opt for a Personal Loan to fund your home renovation, the interest rate on such unsecured loans is generally higher. On the other hand, a Home Renovation Loan is usually offered at similar rates as a home loan since it is secured against your home ownership. This makes it a more appealing option for financing home renovations.

2. Quick And Easy Loan Process:

Home Renovation Loans are processed quickly because they require minimal and straightforward documentation. So you can begin your renovation work as soon as possible without having to wait for a long time for your loan application to be approved.

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3. Less Documentation:

Compared to other financing options, home renovation loans require relatively uncomplicated documentation. You will need basic documents such as proof of identity, income, photographs, property title deeds, etc. If you are an existing customer of the housing finance company, the documentation process becomes even simpler.

4. Usage:

A Home Renovation Loan can be utilised for various home improvements activities such as renovations, flooring, extensions, painting, and repairs, among others. It allows you to use the loan amount for any work that pertains to the structural aspects of your home. However, take note that you cannot use the loan amount for the repair/purchase of movable items such as furniture, fixtures, furnishings, etc.

5. Tax Benefits:

By taking out a Home Renovation Loan, you are eligible for a tax benefit on the interest component. As per Section 24 of the Income Tax Act, 1961, you can claim a tax deduction of up to Rs 30,000 p.a. for the interest you pay on the loan. However, this deduction of Rs 30,000 falls within the overall limit of Rs 2 lakhs for interest payments on self-occupied homes. This means that interest payments on both home purchase and Home Renovation Loans together qualify for a deduction of up to Rs 2 lakhs.

6. Soft Credit Check:

For Home Renovation Loans, lenders typically do not consider the borrower’s credit score since the loan is secured. Hence, these loans are ideal for applicants with no credit history or a good credit score. However, some lenders may require an average credit score to approve the loan.

7. Longer Loan Tenure:

Home Renovation Loans offer a longer loan tenure of up to 15 years. This allows you to select a repayment tenure based on your financial ability, thereby reducing your monthly EMI payments.

Should You Consider a Personal Loan for Home Renovation?

Personal Loans have been a popular loan option for over a decade, mainly because of their fast and easy loan process, minimal documentation requirements, and no need for collateral. They prove to be a handy solution in case of emergencies and financial difficulties. Nowadays, getting a Personal Loan has become even more convenient as most lenders offer it online, allowing borrowers to receive funds within minutes. Furthermore, since Personal Loans do not have any restrictions on the end-use of the loan amount, many homeowners choose to use them for home renovation purposes.

However, Personal Loans also come with a higher rate of interest, typically ranging from 12% to 28% p.a. If you choose a longer repayment tenure, you may end up paying a lot more than the principal amount due to the high interest rates. Apart from the interest rate, lenders may charge a processing fee, which can be anywhere from 1% to 3% of the loan amount, and a pre-payment fee if you wish to close the loan earlier. These fees can range from 2% to 5% and can significantly impact your overall cost of the loan.

Should You Use a Home Renovation Loan?

Our home showcases our personality, and renovating it helps leave a good impression on our guests and also increases its value if you are considering selling it. However, it can be expensive for some people, especially if they are unable to manage these expenses without financial assistance. Home Renovation Loans or Top-up Home Loans are good options to cover these expenses with a lower interest rate compared to Personal Loans. It is advisable to consider taking Personal Loans only in emergencies since they have higher interest rates. It does not make sense to pay more interest when you can obtain the same amount of money with more benefits through a Home Renovation Loan. However, before selecting the lender for a Home Renovation Loan, research and compare different lenders on various parameters such as interest rates, customer reviews, loan approval process, and customer service. Furthermore, carefully read the loan agreement to avoid any inconvenience in the future.

KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

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Disclaimer: This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision.