Sunil was looking to buy a residential flat. He approached a Housing Finance Company for a loan. While going through various loan products being offered, Sunil got confused since he was a first time borrower and had just started to earn. He was in need of a loan with lower Equated Monthly Installments (EMI) for few years. The company official advised him to go for a step-up repayment facility – commonly known as SURF, to help him manage his installments.
Sunil's brother who was already servicing a home loan, wanted to renovate and refurbish his house. Opting for a personal loan was not his ideal option due to higher rate of interest and lower tenor. His banker suggested that he opt for a top-up loan facility instead of a new loan.
Though these two types of loans sound similar, they are for two different types of borrowers/ purpose. Let us understand them in detail.
Step-up loan
A step-up repayment facility (SURF) is a fresh home loan with a staggered repayment schedule. For young borrowers looking to buy homes at an early stage of their career, SURF is a way to manage higher monthly installments, without it becoming a financial burden. Given the average loan size in home loans, installments are comparatively higher and the repayment stretches over a longer period.
In SURF loan, installments for the initial years are kept low, so that they are not a financial burden on the borrower. At a pre-decided periodic interval, the installment amount increases. This factors in the increase in income level of the borrower in the forthcoming years. The lender decides the step-up period based on the age, credit score and repayment capability of the borrower. Opting for this loan is especially beneficial for younger borrowers as they can bear a higher installment once their earning capability increases.
Top-up loan
In contrast, a top-up loan is an addition loan facility extended to borrowers who are already running existing home loans. Top-up loan can be availed for any purpose like renovation of house, extension of floor, marriage in family, higher education, holiday etc. This facility is available at attractive rates when compared to personal loans.
In a top-up loan, an additional loan amount is disbursed based on requirement of the borrower subject to clean repayment track record of existing loan, Loan to Value Ratio, repayment capacity, etc. This loan is treated as a separate loan facility linked to the main loan which effectively means separate loan agreement to be executed and separate repayment cheques to be given. Please note that income tax benefits are not available for top-up loans. The document procedure for a top-up loan is minimal since the borrower is already an existing customer of the financier.
In nutshell, A SURF loan is fresh/ new loan facility, whereas a top-up loan is an additional loan quantum to an existing loan. The documentation required for a step-up loan is as good as a fresh application, wherein top-up loan borrowers are existing customers of the lender who makes it easy to process their applications with minimal documentation and minimal time frame.
The purpose of the loan facility in case of SURF is defined, that is, to purchase a property, while in the top-up facility end use can be for any personal purpose. Furthermore SURF loan is for new borrowers and top-up can be for existing borrowers.
The writer is chief business officer of Aadhar Housing Finance
