What is an Home Improvement Loan?
Customers looking to renovate their existing homes can avail the facility of loans to carry out the necessary changes. Such loans for modification / improvement of the existing homes are provided by Banks and housing finance institutions and are known as Home Improvement Loans.
What is the general scope of Home Improvement Loans?
Usually, the scope of modification may involve substantial changes or repairs to the structure of their homes. This includes extending a room, making a new balcony, painting, flooring, tiling work, all kinds of plumbing or exterior elevation works, internal and external plaster, roof repairs etc.
Who can avail this loan?
While the loan is offered to both existing home loan customers and new borrowers, the quantum is higher for the former. In the case of an existing borrower carrying out repairs on the already mortgaged property, the loan amount can be up to 100% of the cost, subject to the total exposure, including all other loans on that property not exceeding 80% of the market value of the property,
On the other hand, new customers can expect 80-90% of their repair costs to be funded by such loans.
How is the Loan Disbursement?
The process for loan disbursement is much quicker for existing home loan customers, as the lender already has your documents. In that case, your existing property acts as collateral. For new customers, disbursement may take longer time. This can be one of the reasons for many of loan seekers to opt for faster processing loans like Personal loans instead of waiting for a Home Improvement Loan to be sanctioned.
Also, the loan could be disbursed in one shot or in tranches, depending on the progress of the renovation work. The decision lies with the bank depending on various factors including the amount of loan, your CIBIL score etc.
What is generally excluded from the scope of Home Improvement?
- Such loans do not cover furnishing, woodwork or buying consumer durable goods. In fact, most movable furniture cannot be included in the improvement funding.
- Lenders only sanction loans for reasonable expenses. e.g. for a house worth Rs 50 lakh, a flooring estimate of Rs 25 lakh will not be considered. Once you quote an estimate, the bank will send across a valuation expert to confirm it, and to certify that the loan amount is being used for the cited purpose.
What is the processing fees?
The processing fee for such loans keep varying with time and the lending institution. It usually ranges from 0.5% to 0.75% of the loan amount.
Are there any tax benefits of taking this loan?
Under Section 24 of the Income Tax Act, the interest paid on the home improvement loan is tax deductible up to Rs 30,000 per annum. Both the owner and co owner are eligible for tax deduction on the interest paid on such loans. The downside is that the deduction is part of the overall tax benefit of INR 2,00,000 available under the section for interest paid on housing loans.
Summary
While you might be tempted to opt for a personal loan or others, given the long processing time involved in the issuance of a home improvement loan, keep in mind that the latter offers a number of ancillary benefits. It bears a lower interest rate than personal loans, and has a longer tenure, thus ensuring a comfortable repayment schedule. As an added advantage, home improvement loans also yield tax benefits.
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The book "From the Rat Race to Financial Freedom" has many such investment concepts explained in a very simple and uncomplicated manner, especially in the Indian context.
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Manoj Arora
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