It's easy to see that the appeal of a pizza lies in its toppings-pepperoni or paneer, Tandoori or Tex-Mex. The richer the top-up, the better it tastes. The same thing can be applied to almost everything we consume, from coffee to ice-creams. So why not loans? Operating on that logic, most banks and finance companies now offer exciting top-up loans. As Shashank Shekhar, a team leader for IDBI Bank Home Loans says, "It can be used for anything from buying a car to financing your children's education, no questions asked."

PICTURE SPEAK

FEROZ MEHMOOD ZAIDI, 36, EXPORT MANAGER: Zaidi took a home loan of Rs 5 lakh in 1999. This year he topped it up with Rs 90,000 for home improvement, paying an EMI of Rs 1,100.

Top-up loans work on a very basic premise-as you repay your home loan, your outstanding balance reduces. At the same time, barring exceptional circumstances, property prices are on an upswing. This makes you eligible on a second loan over and above the existing home loan. "A house is the single largest asset an individual can own and a majority have to opt for a home loan to make that dream come true. So the idea behind top-up loans is to make the best use of the asset and leverage on the existing loan," explains a senior HDFC official.

Here is how it works. Let's suppose that you took a home loan of Rs 10 lakh five years ago. Since most banks finance up to 85 per cent of the market value of the property, that means that your property was worth over Rs 12 lakh at the time of taking the loan and you have repaid Rs 4 lakh so far. Hence your outstanding amount presently is Rs 6 lakh. Over the same period, the market value of your home has spiralled to say Rs 18 lakh. Therefore, now you are eligible for a maximum top-up loan of 70 per cent of the property's current market value less your home loan outstanding. In this example it works out to Rs 6.6 lakh (Rs 12.6 lakh - Rs 6 lakh). The interest rate levied on this loan is the same as that of a home loan, between 7.75 per cent and 9 per cent at present depending on whether it is a fixed rate or a floating one. It is this factor that prompts many existing home loan takers to opt for a top-up. Says Commander Arnab Das who had taken a home loan a few years back, "One of the main attractions of the home loan is this top-up facility. I shall be availing of it early next year when I get possession of my flat in Delhi to furnish it and do it up the way we want." It is easier on the pocket too as the borrower gets a tax break on the interest paid. A personal loan would have cost 14 per cent and does not qualify for any tax break.

AT A GLANCE

WHAT IS IT? Top-ups are a special kind of loans that are offered at home loan rack rates It is cheaper than loans such as auto loans, personal loans, or sometimes even student loans It is eligible for tax benefit WHY OPT FOR IT? Since top-ups do not require any additional collateral or documentation they are much quicker and hassle free. They have a longer repayment term than other loans. WHAT TO CONSIDER? Check the conditions applicable, particularly about interest rates.

However, before you race out to buy a new car, allow us to act party pooper. Most banks and finance companies have caps. For instance, for HDFC it's Rs 5 lakh while for IDBI Bank it's 30 per cent of the initial loan disbursed. Furthermore, each bank has its own criteria regarding the minimum number of EMIs that have to be repaid before being eligible for a top-up-usually 12 EMIs.

It is important to remember that top-up loans offered by housing loan companies are not related in any way to the top-up facility offered by an insurance policy. Also, while banks claim that the interest rate for top-up loans is the same as that for home loans, what they are referring to are the rack rates and more often than not, customers are offered a discounted interest rate for the home loan. Hence don't expect the exact same deal for both loans. In fact, ICICI Bank offers top-ups at 1.5 per cent to 2 per cent above the rack rates. Finally, top-up loans depend on the repayment capacity of the loan seeker. That means that even if your home loan plus the top-up is under 70 per cent of the market value of the property, the EMIs of all loans should not exceed 30 per cent of your total income.

Apart from being one of the cheapest loans, top-ups are also one of the fastest because of the negligible amount of paperwork involved. This is because the bank or housing finance company already has the required security-your house. So there is no need for any further documentation.

That leaves us with the question, why aren't top-ups popular with other kinds of loans. Says ICICI Bank's Bharat Sharma, Zonal Business Head for North India, "Most assets have a depreciating value but property prices only spiral. Hence most banks offer top-ups on home loans. We do have a similar offer on other products but we don't call it top-up loans." Adds Mridujyoti Hazarika, another ICICI Bank official, "We offer a similar loan to existing customers of personal loans who can take a loan of up 10 per cent of the loan after nine EMIs have been paid. But against home loans we offer 20 per cent of the loan amount." Thus, if you need a relatively smaller amount of cash urgently, there can be no better offer than a top-up loan. This then is the true definition of the cliche "icing on the cake".

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