Could you opt for a home improvement loan?

The festive season is around the corner,and it is this time of the year that many people choose to redo or renovate their homes, before Diwali and Christmas. The dent on their pockets can be eased with the home improvement loans offered by most home loan lending institutions and banks.

There has been a steady growth in the off-take of home improvement loans. Though currently the percentage is very small, the growth is higher than before. The product is gaining acceptance as more people are seeking to upgrade their homes and interiors.

As home loans are capped at 85- 90% of the property cost, people try and make up the difference by opting for home improvement loans. In other cases, customers who have the eligibility and do not want to block their personal money, may go in for this option.

Almost all banks and financial institutions offer this product. The product is very similar to a home loan and the property is mortgaged to the bank or institution. In some institutions the rate of interest is higher as instead of the property being pledged, other collateral security is taken.

Some of the home improvements that you could undertake with home improvement loans are external repairs, waterproofing and roofing, internal and external painting, plumbing and electrical work, tiling and flooring, grills and aluminium windows, waterproofing on the terrace, construction of underground/overhead water tank, paving of compound wall.

The Home Improvement Loan is catching on in the urban areas as it helps a person get a major chunk of the repair expenditure or sometimes the entire amount spent on renovating a home. You can get a loan from Rs 50,000 to a maximum of Rs 10 lakh under this head with a maximum repayment period of 15 years.

Home improvement loans, like home loans, are available under fixed rate and adjustable rate with annual/monthly rest options. Says an HDFC spokesperson, “A home improvement loan is a very simple loan which allows the borrower to do all the repairs and renovation except for furnishings, the main criterion being getting an estimate from the architect.An existing home loan customer of HDFC can get finance for the entire cost of improvement of the property and can even avail 100% finance for improvements to rented properties. However, this is subject to providing as security an extension of the mortgage of the property already created in favour of HDFC. New customers can borrow upto 85% of the cost of improvement.” He further adds, “The rising popularity of this loan has also been due to the income tax benefit available on this loan under Section 24 of Income Tax Act. The home improvement loan is the second largest product after home loans as it has a higher value cost. Institutions like HDFC even give home improvement loans without mortgaging the property but instead going in for collateral security like shares or some other assets.”

The home improvement loan works in this manner: the borrower will have to work out an estimated cost of the work to be done and give it to the financier,who will take a quotation from the architect to verify the estimate submitted. In order to reap this benefit, the interest amount of the home improvement loan plus the interest amount of the home loan should be within Rs 1,50,000 per annum. Home improvement loans are a trend during festivals. However the demand is yet to pick up for this product. The rate of interest of this loan is higher and the security of the property lies with the bank, hence the bank remains safe. Says Rajiv Sabharwal, Head – Mortgages and Real Estates, ICICI Home Finance, “Structural changes like adding a floor or a room, waterproofing and roofing are eligible for funding through this loan but based only on evaluation. The percentage of population funded by this loan is merely 5%. People also avail of this loan as soon as they buy a flat so as to come along with the home loan or after they decide to do their home interiors,say,after six or seven years.If the renovation period falls during the festive season it is an added advantage as it helps give a new appearance. Hari Nair, CEO of R.N.A (NG) in Mumbai opines that basically,there are two reasons people prefer a home improvement loan. On a home loan, the buyer gets 85 % of the benefit with 5 % from stamp duty registration. Hence, to avail 100 % finance for the flat,he goes in for a home improvement loan at the same time. “The demand for such loans is rising among the higher income groups and is a little higher during the months starting from September until February end. As most festivals fall in this period, people find an opportunity to renovate their homes.” The recent deluge in Mumbai led to people opting for these loans in order to repair their homes. The loan is sanctioned only with the architect’s consent and the estimate of the repairs and the finance that is subsequent to it. So this festive season,if you are considering doing up your home, you could opt for a home improvement loan. It might be worth your while!