Many first-time home loan applicants get confused between a ‘home loan’ and a ‘loan against property.’ They believe that both are the same and tend to use the terms interchangeably.
However, the truth is that a home loan and a loan against property are two entirely different financial elements. Although their features and benefits may seem quite similar, they are entirely different in more than one way.
So, if you are wondering how a loan against property is different from a home loan, this guide is for you.
What is a home loan?
Home loans are a type of credit that you can avail yourself of from any financial institution to purchase a new ready-to-move house, an under-construction property, or a plot of land on which you want to build your home.
Home loan companies generally provide a loan of up to 80% of the property value as a loan, and you must pay the balance amount from your pocket, which is called a down payment.
It is a secured loan, which means, you mortgage the house with the bank against the amount you borrow. The lender charges interest on the amount on a fixed or floating rate basis, and you must repay the amount – both the principal amount and the interest in EMIs (Equated Monthly Instalments). If you fail to make the payments on time, the lender reserves the right to auction off the property and recover the amount.
What is a loan against property?
Loan against property is also commonly known as a mortgage loan. With this loan, you can avail yourself of credit by pledging your existing real estate property. Typically, the lenders lend only a certain percentage of the market value of the property’s value that you own.
While you borrow a loan against property, better known by its acronym, LAP you must hand over the property documents to the lender. Just like the home loan, you repay LAP in affordable EMIs, which consists of both the principal amount and the interest.
Now that you know what a home loan and LAP are, let us do a home loan vs mortgage loan comparison based on different factors.
Interest rate
The interest rate is one of the most significant differentiating factors between LAP and home loans.
Generally, the housing loan interest rate tends to be a few points lower than that of a loan against property. This is mainly because the RBI (Reserve Bank of India) and the Government of India aim to make housing loans affordable for all so that they can become homeowners.
Fund usage
Another important aspect in the home loan vs loan against property comparison is the end use of funds that you borrow. In general, lenders have strict limitations on home loans. You can use the funds only to buy a new or under-construction property or a plot of land.
However, with LAP, lenders do not have such restrictions. This means you have the flexibility to use the funds for any purpose you want, such as paying your child’s college fees or expanding your business.
Loan duration
When discussing the difference between home loans and mortgage loans, the duration factor must be considered.
When applying for any kind of loan, the duration plays a critical role as it has a direct impact on the EMI and affordability. A home loan is a long-term loan, and most lenders in India offer home loans for a maximum period of 30 years.
In contrast, you can take out a loan against property for 15 years. However, lenders still allow you to choose the repayment tenure based on your repayment capacity. Also, you can partially or fully repay the loan before the actual tenure.
Top-up facility
Most lenders in India offer a top-up option on loans against property. This essentially means you can get more funds on top of your existing loan as necessary, giving you the flexibility to use the money to meet different financial obligations.
You don’t have such a facility with home loans. However, some lending institutions nowadays may allow you to take a top-up loan based on their assessment of your financial credentials.
Tax exemption
Another important difference between a home loan and a loan against property is the tax benefits factor. With a home loan, you can avail yourself of a tax benefit of up to Rs. 2 Lakh on the repayment of the interest under Section 24(b) of the Indian Income Tax Act.
Also, you can get a tax benefit of up to Rs. 1.5 Lakh on repayment of the principal amount under Section 80C.
In addition to the above exemptions, you can get an additional tax benefit of Rs. 50,000 under Section 80EE if you are a first-time home buyer. Also, to get this tax benefit, the home loan amount should be more than Rs. 35 Lakh.
For a loan against the property, the tax benefit is covered under Section 24(B) of the Indian Income Tax Act.
You can get a deduction of up to Rs. 2 Lakh on the repayment of the interest. However, this tax benefit is available to you only if you have the amount to fund the purchase of a new house.
Loan to Value
When you do the mortgage vs home loan comparison, you cannot overlook this critical factor.
Loan to Value or LTV is essentially the maximum loan amount you can get against the value of the property. The LTV ratio for a home loan differs from one lender to another, but the maximum ratio is up to 90% of the property’s value as assessed by the lender.
The LTV ratio for a loan against property is usually in the range of 40% to 60% of the property you pledge as assessed by the lender.
Final Word
A loan against property differs from a home loan in several ways. Both have their features.
As a borrower, you must know your exact needs and apply for the right loan. You can apply for a home loan if you want to buy a new house or take out a loan. If you want funds to meet a certain expense, you can leverage your property and apply for a loan against it.
Make sure you apply for a loan with a mortgage lender, which offers different loan solutions at the most competitive interest rates.