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As with a child, acquiring a house is the first step to a lifetime of responsibility. A house demands frequent maintenance, from painting it and replacing broken fixtures to remodelling a room and restoring the tiling. You can probably finance most of these needs yourself, but if a major overhaul becomes necessary, you may require more money than you have.
However, you don’t need to put your plans on hold till you amass the required funds. Simply walk into a bank and take a home improvement loan.
Home improvement loan Most banks provide home improvement loans to people for renovating their houses. You can take the loan for internal and external repairs, adding a room, painting, roofing, waterproofing, plumbing, flooring, woodwork, etc. The loan can be taken for up to 15 years and the interest rate ranges from 10.5-14%. A few banks also provide a loan for buying furniture.
“Such loans score over personal loans as they are secured and, hence, their rate of interest is 4-5% lower than that of personal loans,” says Sumit Bali, executive president, Kotak Mahindra Bank. The lender will finance up to 80% of the renovation, while the balance will have to be paid by you. The final amount that is sanctioned will depend on the sum quoted by a certified architect, your repayment capacity, and the total value of the property.
The bank usually gives the money directly to the contractor, though it may also give it to the borrower if he produces the required receipt and bills.
“To avail of a home improvement loan, you need to furnish documents and bills provided by an architect and your bank account statement for the past six months. Apart from these, a KYC (know your customer) form and property documents are mandatory,” says Sonalee Panda, head, marketing, ING Vysya Bank. Some banks will require you to provide a no-objection certificate from your housing society and municipal corporation if you are remodelling the house.
Take a loan for your home renovation
The paperwork will be reduced if you take a home improvement loan from the same bank that has given you the home loan. Some lenders insist on a physical verification of the property before sanctioning the loan, though most are not so stringent about how the loan amount is used and don’t come for a property check. The processing fee is usually between 0.5% and 0.75%.
If you prepay the loan, you will have to pay about 2% of the outstanding amount as a prepayment charge. Such a loan can be taken even for a house for which you have already taken a home loan, though the bank will decide how much to give. Arvind Hali, head of retail assets & credit cards group, Dhanlaxmi Bank, explains how this is calculated. “Suppose, you bought a house for Rs 100 and took a loan for Rs 80. After two years, the value of the property appreciated to Rs 115 and your loan liability decreased to payday lending Lynchburg Rs 70.
In such a case, about 45% of the title of the house is secure and in your name. So, you will be eligible for a home improvement loan.” Is this the best option? You can also opt for other loans to fund your needs, such as a loan against property. If you already have a home loan, you can go for a top-up loan on the existing one. The interest rates for both these types of loans range from 10.5-14%. However, a home improvement loan is better than either of these as some banks may give the loan at a marginal discount of 50 basis points compared to the other two loans.
Also, in the case of a top-up loan, the amount you get will depend on the outstanding amount of the existing home loan and you will need to have a clean track record for at least six months to a year. Another reason is that you are entitled to a tax benefit of up to Rs 30,000 a year on the interest payment of the home improvement loan.
Bali says, “For a comparatively smaller amount you should try and avoid mortgaging the house, so loan against property is not a sensible choice.” Hali say that the only benefit of taking a loan against property is that “the repayment time frame is typically longer than that in a home improvement loan”. However, as the latter is usually not a large amount and can be paid off in 2-5 years, it is the better choice.