Many home loan applicants, especially first-time borrowers, need help understanding the difference between a home loan and a loan against property. Some people believe these loans are identical and use the terms interchangeably. Both are entirely different products and serve various purposes.
If you want the best home loan in India, it’s essential to understand the difference between a home loan and a loan against property. In this guide, we will help you understand the differences and make the right borrowing decision.
- End usage of the loan
As the name suggests, a home loan is a credit type you obtain from a bank or non-banking financial company (NBFC) specifically to purchase a ready-to-move flat or an under-construction property developed by the government or a private builder. You may even use this loan to construct a residence on your land.
On the other hand, a loan against property, also commonly referred to as a mortgage loan, gives you more flexibility in terms of how you want to use the funds. You can use it for business and personal purposes as you like, and then lenders don’t have any restrictions on the end usage of the funds. You can use the money to go on a family vacation overseas, renovate your home, buy new business machinery, pay employees’ salaries, etc.
- Loan tenure
Another significant difference between a home loan and a loan against property is the loan tenure or repayment period. This is a critical factor in any loan as it has a direct impact on the EMI (equated monthly installment) and affordability. If you don’t have a large disposable income and cannot afford to pay high EMIs, you can choose to get the loan for a longer tenure.
If you are looking to avail yourself of a home loan or loan against property, choosing the tenure carefully based on your financial situation is paramount. Generally, the lenders give you the flexibility to choose the loan tenure. However, the maximum tenure for a home loan is 30 years, which gives you enough time to repay the loan.
In contrast, loans against property have a much shorterย tenure. While it may vary from one lender to another, some of the leading NBFCs offer loans against property for up to seven years.
- Interest rate
No matter the kind of credit you avail, be it a housing loan or a loan against property, the interest rate levied by the lender is one of the most critical factors to consider. Just like tenure, the interest rate directly impacts the EMI.
The interest rates for home loans are generally lower than loans against property. Today, due to the immense competition among different lenders in India, you can easily get a home loan at affordable interest rates. The key to getting the best home loan offer is to research different lenders, compare the offers, and choose the right lender.
Also, you must know that the actual interest rate applicable to your loan will greatly depend on the lender’s eligibility assessment of your application, which is based on factors like age, income, profession, credit history, etc.
The loan against property or mortgage loan interest rates are usually a few points higher than a home loan. Generally, the lenders fix the interest rate on LAP based on the kind of property you mortgage. If you mortgage a commercial property, you may be able to secure the loan at an attractive interest rate. Do your due diligence, negotiate with the lender about the interest rates for different types of property and choose the collateral accordingly.
- Loan-to-Value Ratio
When comparing a home loan to a loan against property, you cannot overlook one of the most critical differentiating factors: the loan-to-value ratio (LTV). It is the ratio of the maximum loan amount that the financial institution will lend against the property’s value.
Generally, the LTV for home loans is higher than the LTV for mortgage loans. Most lenders in India offer a home loan of up to 80% of the property’s value. In some cases, if you have an existing relationship with the lender, you may get a loan of up to 90% of the property’s value. That means you can afford to purchase a bigger and better home for your family without worrying about a huge downpayment.
The loan-to-value ratio for a loan against property is much less than a home loan. The maximum amount you can borrow against the property you pledge greatly depends on the type of mortgage you offer. Many lenders in India offer a maximum of 60% of the property’s value as a loan. However, in some cases, if you pledge a commercial property, you may get a loan of up to 70% of its value.
- Tax benefits
Another important difference between a home loan and a loan against property is the tax benefits associated with both these loans.
Housing loans not only help you get the funds to purchase your dream home but also help you bring down your annual tax liability. As per the existing tax laws in India, the principal amount and the interest amount you repay to the lender are eligible for tax deductions. You
can claim a tax benefit of up to โน1.5 Lakh on the repayment of the principal amount in a financial year under Section 80C of the Indian Income Tax Act. Also, you can claim a deduction of up to โน2 Lakh in a financial year under Section 24 of the IT Act. And the best part is you can claim the deductions every year throughout the repayment period or until you repay the full amount.
For loans against property, there are no separate tax benefits available. However, if you use the amount you secure through LAP for business purposes, you can claim the interest paid on the loan as a business expense and reduce your overall annual tax liability.
Conclusion
Thus, home loans and loans against property have more than one difference. Now that you know how these loans serve different purposes, assess your needs and choose the right type of loan accordingly. Also, it is advisable to apply for a loan with only reputed and trusted lenders to get the best offer and hassle-free borrowing experience.
