The home is where the heart is! This statement holds true and that is why everyone likes to own a beautiful home, with the best fittings and interiors, etc. Many a time it so happens that while going in for home individuals like to be on the conservative end due to the exorbitant cost of owning a home that they do not factor in the cost for the home beautification. The need for beautification or improving a home may also come up a few years down the line, after the purchase of the house.
Whether it is beautification, improvement or renovation of your home, nothing comes cheap. Currently, it is said that the cost of doing interiors of a home can range anywhere between 10-40% of the project cost. The sky is the limit to what you can do with your home.
The bottom line here is that you should be able to meet the cost of the modification or addition that you are looking to do. If you are in a scenario where you wish to make some improvements to your home but would like a little support in the form of a loan, what are the options available? And which of these options work out cost-effective and are easier to avail?
This post of ours is aimed at giving you the best options for a home improvement loan.
What is a Home Improvement Loan?
A loan that is availed for carrying out any improvements or renovation to your home such as the addition of rooms or floors, painting, external or internal work or modifications, remodeling, etc can be called a Home Improvement Loan.
What are the different options available for a Home Improvement Loan?
Main features of a Home Improvement Loan are
A home improvement loan is available to the person in whose name the property is.
As with other loans, home improvement loans can cater to about 80-90% of the project cost depending upon other factors like your credit score, etc. To arrive at this estimate you would need to obtain the valuation of the work planned from an architect or a civil engineer.
The tenure of home improvement loans can range to 15 years.
The rate of interest could start from 9% onwards. Both floating and fixed-rate loans are available.
Generally, these loans are lent at the same interest rate as a home loan.
Home Improvement Loans
There is a separate category of loans available called the Home Improvement Loans. These are available with most banks, NBFCs and Housing Finance Companies. These loans are considered on par with home loans.
A home improvement loan can be availed on an existing home mortgage loan. When it is done so, the borrower has a better chance of getting up to 100% of the funds required as a loan. However, the loan in total will not exceed 80% of the market value of the property. However, in this case, the home will continue to remain mortgaged with the bank or the financial institution until clearing the loan.
On the other hand, a new customer approaching the bank for a home improvement loan may be approved only about 70-80% of the estimated cost of home improvement.
Income Tax benefit for Home Improvement Loans
As with normal home loans, interest paid on home improvement loans is also eligible for deduction as a loss on house property under Section 24 of the Income Tax Act. This benefit is also eligible if the loan is availed in a joint mode. The allowable deduction is in the proportion of the shares in the house ownership and the proportion in which the interest is paid by the co-applicants. However, applicants should keep in mind that this interest deduction is not over and above the deduction normally available for a home loan, ie., Rs 2 lakhs.
Processing Fee On Home Improvement Loan
Processing fee of 0.5 -1% of the loan amount is chargeable on the loan.
Documentation Required for the Loan
Usual documents required for a home loan are required to avail of a home improvement loan, however, if the loan is availed from the existing lender then the process may be much quicker as all the documents are already present with the lender.
Top-Up Home Loan
A top-up home loan is another option available to an individual looking to carry out home improvement. Just like you top-up your prepaid balance on mobile phones, a top-up on a home loan is also available from banks, NBFCs or HFCs.
For Example: If you have availed a home loan of Rs 50 lakhs and after 10 years your outstanding principal amount has reduced to Rs 30 lakhs, you can avail a top-up loan to meet the needs of home improvement.
This feature, however, is not approved for all individuals but financial institutions take a call based on the repayment history, credit score of the individual and other factors like existing debts being catered. The market value of the property plays a big role in deciding the approval on this loan. The rate of interest on a top-up loan is generally higher than a home loan but it is still affordable as it is lesser than a personal loan. A processing fee of about 1% of the loan is charged.
However, this loan comes with open-ended use criteria, meaning this loan can be utilized for any reason like funding education, starting a business, etc.
A personal loan comes across as an easy and convenient loan. As it is not bound to any end-user criteria, it can double up as a home improvement loan. Availing a personal loan is easier on documentation front as well as it requires minimal documents in the form of salary /income statement, address and identity proof. Moreover, there is no requirement of collateral to avail a personal loan.
The rate of interest charged on a personal loan, however, is higher in the range of 12-25%. The processing fee is also higher and is in the range of 2-3%. Only fixed-rate personal loans can be availed and a penalty is generally payable on prepayment of the loan. The tenures of personal loans are shorter with a maximum of 5 years.
Loans can be obtained against the security of gold held by you. This comes across as an easy way to put into use an illiquid asset like gold. This loan is easier on documentation as it is availed against the security of a pledged asset.
The gold loan comes as a savior when you do not find yourself eligible for a home improvement loan due to reasons like a poor credit score or not having a clear title to the property. A gold loan can be utilized for any purpose as desired by the borrower.
The rate of interest charged on a gold loan stands in the range of 11-17% and a processing fee of 1% is chargeable. The disbursement is faster. However, gold loans are lent at about 80% of the appraised value of the gold. So to be able to avail a huge amount as a loan, you would need to pledge a higher quantity of gold.
Loan against Property
If the property that you intend to improve/modify is free from the earlier loan, you could also think of going in for a loan against the property. In this kind of a loan, the property is mortgaged with the lender and value of 50-60% of the property value is allowed as a loan. This loan comes in handy if the fund requirement for improvement is huge.
However, the property is again mortgaged with the lender until the loan is cleared. The rate of interest charged is higher than a home improvement loan at 11-25%.
After going through all the different options available for home improvement loans, one can come to the conclusion that a home improvement loan from your existing lender comes across as the best options, in terms of tenure, rate of interest and income tax benefits available. It is good to consider other loans only if you are not able to avail of this loan.