If you have taken a home loan to build that dream house, chances are that your finance are a bit stretched. This means that you can’t think of stumping up cash to meet the educational loan for your child or that new car that you wish to buy.

Most banks will offer personal loans to customers — but the interest rates are fairly steep at 13-36 per cent, depending on your risk profile. That’s where the top-up loan comes. It’s a cheap personal loan option offered to people who have a pre-existing home loan — and the beauty is that the rate on offer is the same as home loans at 7.5–8.5 per cent and there are no end-use restrictions on the loan amount.

Top-up loans are given based on the outstanding home loan amount and thecurrent property value. It works like this.

Suppose, you have a home loan outstanding of Rs 3 lakh and the current market value of your house property is Rs 8 lakh. You can get a top-up loan up to 70 per cent of the market value of the house property from HDFC. It works out to Rs 2.6 lakh calculated at 70 per cent of Rs 8 lakh minus the outstanding loan amount of Rs 3 lakh.

The top-up loans of ICICI Bank have a cap on lending, up to 20 per cent of the original loan amount. Two conditions can make you eligible for a ‘top-up loan.’ First, an appreciation in the market value of your property and, second, repayment of your loan outstanding. So, what is the difference between such a loan and a loan against house property?

In essence, both operate in the same manner, but the difference lies in the crucial factor— the interest rate. Interest rates on loans against home property are typically higher than that of home loan rates by 11.5 per cent. You can spend it on anything your heart desires, be it on higher education or a new car. This cheap financing can come handy if you want to reduce your effective cost by prepaying any existing loans borrowed at a rate, subject to prior checks for any pre-payment penalties for part pre-payment.