Renovate with a home loan

The festive season is just around the corner, and this is when many people choose to redo or renovate their homes. Expenditures at this time of the year are always high and taking a home improvement loan can reduce the pressure on the pocket.

As home loans are capped at 85-90 per cent 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 can go in for this option.

Home improvement loans

Almost all banks and financial institutions offering home loans 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 aluminum windows, waterproofing on the terrace, construction of underground/ overhead water tank, paving of compound wall (with stone/tile/etc).

The home improvement loan is catching on in the urban areas as it helps a person avail a major chunk of the repair expenditure or sometimes even 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 is 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 per cent 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 up to 85 per cent of the cost of improvement." He further adds that 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 by going in for collateral security like shares or some other assets.

How Home improvement loan works

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 avail 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 has 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.

According to me "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 involved in improvements funded by this loan is merely 5 per cent. People also avail of this loan as soon as they buy a flat 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 the home a new look."

Basically, there are two reasons why people want a home improvement loan. On a home loan, the buyer gets 85 per cent of the benefit with 5 per cent from stamp duty registration. Hence, to avail 100 per cent 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 end of February. As most festivals fall in this period, people find an opportunity to renovate their homes. The recent deluge has led to people opting for these loans in order to repair their homes.

According to my friend who is a architect, "This loan is preferred any time of the year but since most of the festivals fall after monsoon, people find an excuse to redo their house if the need arises."

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 make the process a little easier by opting for a home improvement loan.

Documents needed for Home improvement loans.

Apart from a filled loan application form, you must submit:
Two photographs
Latest salary certificate
Form 16
IT returns
Cost estimates

Repayments are usually made in equated monthly installments (EMIs) usually for a tenure of 4-5 years. If you already have a home loan with the lender, the documentation and process for getting a home improvement loan may be fairly simpler.