Loans to renovate your home

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Loans to renovate your home

Khyati Dharamsi / DNA MONEY | 2008-09-27 16:00:23

home loan

Are you planning to postpone your plans to fix up patches on your living-room wall or to include the gallery into your bedroom as the Diwali bonus you were expecting may not materialise?

You do not have to do so. Home-improvement loans might help you meet the renovation costs, and that too at interest rates lower than those applicable on personal loans.

Kamlesh Rao, vice-president & business head (personal finance), Kotak Mahindra Bank, said many people are not aware about home-improvement loans. "They still take a personal loan to meet these expenses. The interest rates on these (personal loans) are always higher as they are unsecured. A home-improvement loan works out to be much better," he added.

Home loan interest subsidy for the poor

Most banks that offer home loans also provide home-improvement loans, on both fixed and floating rates of interest. These can be asked for meeting expenses on renovation works such as waterproofing, flooring, painting, plumbing, electrical repairs, building water tank, compound wall, etc. However, this loan is only granted for civil constructions and not for furnishing alone.

Most public sector banks have an upper cap of Rs 2-5 lakh for such loans, while the tenure will be limited to 10-15 years. Loans of a higher amount are given only after special considerations in PSU banks.

The loan is to be repaid in equated monthly installments (EMI), which can be deducted via automatic debit or paid through post-dated cheques. Some like Indian Overseas Bank offer an EMI holiday for the initial three months.

Home-improvement loans can be taken even if you already have a home loan going for the same house. "It's preferable to take a home-improvement loan from the financer that you have already taken a home loan from," Rao said. Several banks offer a higher percentage of the repair costs - in some cases 100 per cent – to those who already have a home loan with the same bank.

‘Home loan delinquencies may rise on reckless lending’

Housing Development and Finance Corporation offers 100 per cent of the improvement costs to its existing housing loan clients, while Canara Bank offers 85 per cent of the costs to existing home loan borrowers vis-Ã -vis 80 per cent given to fresh borrowers.

The differential between the actual repair costs and the amount banks provide as loan is called the margin. Banks keep these margins as different contractors may quote different rates. Some of them inflate costs and hence the cushion.

The amount that will be granted to you will depend on the quotations that you get from the contractor or architect whom you plan to hire. If the refurbishing plan includes extension of the house, the bank will ask for the necessary permissions from the municipal corporation or the authority. The loan will be disbursed to the contractor in most cases.

The other documents required, apart from the quotation and the permission letters, are identity and address proofs, proof of stable income for the past three years (such as bank account statements or Form 16) and photographs.

When your home loan repayment stretches to infinity

In case the house for which the improvement loan is being taken cannot be mortgaged, you have to mortgage some other property or security. The value of this security has to be twice the amount of the loan granted for home improvement. The documents of the other security to be mortgaged will also be required to be submitted.

Most banks and financers have the application form for home-improvement loan on their website. These can be printed and submitted.

Like any other loan, a processing charge is required, which is a fee banks levy for providing the service and processing your loan papers. This fee is between 0.3-1.5 per cent of the total loan amount granted.

A prepayment penalty of usually 1-2 per cent is charged by most banks for full prepayments.