Recently, The Reserve Bank of India (RBI) has expressed its concern about home loan top-up asking lenders to be vigilant and conduct due diligence while issuing home loan top-up.
The allure of top-up housing finance is undeniable, offering additional funds on existing loans, however, the financial crisis of 2008, marked by the collapse of Lehman Brothers, serves as a stark reminder of the dangers of over-leveraging.Salil Seth, Partner, Khaitan & Khaitan
Adding, “The temptation to use top-up home loans for non-essential expenses is risky. The Lehman Brothers crisis, driven by excessive borrowing, highlights the dangers of ignoring debt risks.The RBI Governor’s address underscores the need for caution.”The home loan top-up is the loan amount which can be borrowed against the difference of principal loan amount already borrowed and amount of the same property on which the loan is issued.
Arman Sharma, Partner, Anand Sharma and Associates said, “Concerns have been expressed by RBI Governor, Mr. Shaktikanta Das over Top-up Housing Loans because RBI only permits supplementary/additional finance in the nature of Top-up Housing Loan for carrying out alterations/additions/repairs to the house/flat already finance by a Borrower and if Bank(s)/NBFC(s) are not cautioned in offering such Top-up Loan and its use by such Borrower.
This may result in the same being deployed in unproductive segments or for speculative purposes thereby resulting in highly speculative investments, eventually attracting unnecessary risks and hampering long-term financial stability for party(s) involved.Arman Sharma, Partner, Anand Sharma and Associates
The purpose of home loan top-up can be renovation, repair and upgradation of the house on which the home loan is already running. However, the same should not used for speculative purposes.
Now, the lenders can ask additional details about usage of the home loan top up to be produced, even denying if the same is to be used for speculative purposes.
