The Reserve Bank of India (RBI) has raised concerns over the increasing trend of top-up home loans, cautioning that borrowers might be using these funds for speculative investments, particularly in the stock market. The central bank has urged lenders to carefully monitor the purposes for which these top-up loans are being taken.
RBI Governor Shaktikanta Das, during the Monetary Policy Committee meeting briefing, highlighted the issue: “One of the areas we are closely watching is the rapid growth of home equity loans, or top-up housing loans as they are known in India. Additionally, banks and NBFCs are offering top-up loans on other collateralised loans like gold loans. However, it has come to our attention that some entities are not strictly following the regulatory guidelines related to loan-to-value (LTV) ratio, risk weights, and monitoring the end use of funds. I emphasize that this is observed in certain entities. Such practices could result in these loans being used for unproductive or speculative purposes. Banks and NBFCs are, therefore, advised to review and correct such practices.”
Typically, home loan borrowers opt for the maximum loan amount possible under the eligible loan-to-value (LTV) ratio at the time of taking a loan. However, as property values increase over time, there is often scope to take additional loans. Lenders usually offer home loan top-ups when the property’s value has risen, making the borrower eligible for a higher loan amount based on the LTV ratio. If a borrower initially took a loan below the maximum LTV, they can also take a top-up loan up to the permissible LTV gap.
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For example, if a borrower took a home loan of ₹40 lakh as 80% of the property value of ₹50 lakh, and the property’s value increased to ₹70 lakh after three years, their overall loan eligibility would rise to ₹56 lakh (80% LTV). This would allow them to take an additional loan of ₹16 lakh as a top-up. Similarly, if the borrower initially took a loan below the full LTV, they could take the gap amount as a top-up.