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About Home Improvement Loans

Often, after staying in an own home for a long period, the owner may choose to make certain alterations which will make the home more aesthetic. In such a scenario, the funds may be either brought in from one’s savings or can be borrowed from banks/non-banking financial corporations (NBFCs). The funds borrowed for home improvement are termed as home improvement loans. They include remodeling, updating and making repairs to their home. Loans can be used for roof repair, re-furbishing interiors, updation of gadgets and electric wiring around the house or any other new addition.

Generally, home improvement loans are of lower value compared to home loans, the tenure is also lesser in comparison to home loans which typically runs over a decade. Home improvement loans are unsecured loans, however, if the quantum borrowed is of higher value, then the home may become the collateral for such a loan. Home improvement loans may also be taken for extension of the house, this would also qualify for home loan. However, if the owner does not want to provide his house as collateral and if the quantum of loan is only minimal, then the owner may choose to borrow it as an unsecured loan.

Home Improvement Loans
Home Improvement Loans

What is the purpose of home improvement loans?

The home improvement loans can be used for various purposes as mentioned below –

Major repairs, upgradation or remodeling:

The funds so borrowed may be used for major repairs, updates and remodeling of the house. The remodeling of the house can be carried out using the home improvement loan, this extensive remodeling will require hefty funds as compared to any other repairs. The home improvement loan can be an unsecured loan in case the quantum of loan is on the lower side. If the quantum of loan is hefty, then the bank or NBFC may insist on collateral, the home may become the collateral in such cases.

Home extension or roof repair :

Home extension or roof repair may require more funds, this could almost be equivalent to a home loan of lower value. The unsecured loan in the form of home improvement loan would have interest rates different from that of personal loan.

Minor repairs or upgradation :

Home improvement loans may be borrowed for minor repairs and upgradation. This would be a lower quantum loan with a short tenure. The interest rates would be high since it is an unsecured loan.

Re-furbishing interiors :

It has become a trend to refurbish the interiors often. The interiors typically cost 10% total cost of the apartment/home. During the first time, the interiors are added alongside the cost of acquisition of the house. The home loan that is borrowed will include the cost of interiors as well.

Extensive electric or plumbing work :

Often, after many years, there may be a need to conduct an extensive electric or plumbing work. This could be needed due to the fact that the existing arrangement could have deteriorated sharply. This can be funded using home improvement loans. The funds required for electric or plumbing work would be of lower quantum and shorter tenure. Hence, the home improvement loan with this purpose would be an unsecured loan.

Key features of home improvement loans

The key features of home improvement loans are –

  • Lower quantum compared to home loan – the quantum of loan for home improvement is lower compared to home loan.
  • Lesser tenure compared to home loan – the lesser tenure is shorter ranging from 3 months to 5 years. The tenure is much lower compared to that of home loans.
  • No tax benefit – Home improvement loans unlike home loans do not come with tax benefit.
  • Higher interest rates compared to home loan – Higher interest rates are applicable on home improvement loans since they are generally unsecured loans.
  • Unsecured loans – Home improvement loans are unsecured loans as compared to home loans which have the home being purchased or constructed as collateral.

Eligibility criteria for home improvement loans

Every bank has its own criteria for home improvement loans, the broad guidelines applicable for home improvement loans are –

  • Apply for loan as an individual or jointly with other owners of the property being co-applicants
  • Salaried and self-employed individuals can also apply for these loans
  • Minimum age – 21 years; maximum age – 65 years (at the time of loan maturity)
  • Even companies can apply for this loan provided they have been in operation for a predefined minimum period
  • Companies applying for this loan may also be required to be in a position where they have been making profits in the last few years
  • All the owners of the property will have to be co-applicants for the loan

Documents required for home improvement loan

The documents required for home improvement loans would differ from bank to bank, however, broadly, there are standard documents which are required for all types of unsecured loans –

  • Application form with photographs
  • Salary statements, Form 16 or ITRs for salaried employees
  • Profit and loss statement, Balance sheet and ITR for self-employed professionals
  • Bank statements of last 6 months
  • Original property deed required by some banks
  • Quotation from architect on the estimate on how much the renovation or improvement is going to cost
  • Address proof, Identity proof, age proof – PAN, driver’s license, Aadhaar card, passport or any other document issued by Government of India can be used as proof

Interest rates applicable on home improvement loans

There are two types of interest rates which may be offered to borrowers by various banks –

Fixed interest rate - The rate of interest is fixed before the loan is approved. This interest rate will remain fixed during the tenure of the loan. The range of interest can vary between 9% to 15% per annum. The actual rate would depend on the bank from which the loan is borrowed. The interest rate would also vary based on borrower’s income, employment, age and credit profile. With better income and higher credit score, the borrower will be able to negotiate lower interest rates. Salaried individuals tend to get a lower interest rate as compared to self-employed applicants.

Floating interest rates - The interest rates in the case of floating interest rate is linked to the prime lending rate of the bank. This prime lending rate is affected by repo rate. Repo rate is the rate at which the bank borrows money from the central bank. This fluctuates based on the macro economic scenario of the economy. The advantage of the floating interest rate is that it tends to be a bit lower than the fixed interest rates.

There are hybrid loans offered by banks which are a combination of fixed interest and floating interest.

The borrower is allowed to switch from fixed interest rate to floating interest rate, this can be done by payment of a nominal fee. The option is provided at the discretion of the bank.

Frequently asked questions

1. What is the loan to value ratio applicable on home improvement loans?

The loan to value ratio would vary across banks, typically banks offer anywhere between 90% - 100% for home improvement loans

2. Are there any income proof requirements for these loans?

Each bank has its own income proof requirement. Typically, Form 16, ITR and bank statement is required to be submitted by salaried employees. Profit and loss statement, Balance Sheet, ITR needs to be submitted by self-employed professionals for availing home improvement loan.

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