Home Loan vs Loan Against Property: What should you choose

Many people are unaware of the difference between a Home Loan and a Mortgage Loan. However, the two loans are different in many ways. Let’s learn about them. Home Loans finance property, while Mortgage Loans use the existing property as collateral. They have different interest rates and repayment tenures.

Based on your purpose, you can choose a loan. If you plan to buy a home, you can go for a Home Loan. If you need a large amount of money for any business or personal purpose, you can take a Mortgage Loan against your commercial or residential property. 

Let's check out what these loan terms actually mean and how they are different from each other.

What is a Home Loan?

A home loan is a sum borrowed from a financial institution to purchase a house, property or a plot of land for the construction of the house. This is a secured loan, in which the lender keeps the house or property as a mortgage until the loan amount is repaid. In layman’s terms, the lender holds the title deed of the property, until the loan amount is fully repaid, along with the interest due.  After which, the lender formally transfers the ownership of the house property to the borrower.
 

What is a Loan Against Property?

A Loan Against Property or LAP is a mortgage loan where you pledge your immovable assets—personal or commercial—to secure a loan. The advance made is equal to a certain percentage of the market value of the property and can be taken for both personal and commercial use. 

One of the key differences between a home loan and LAP is how financial institutions handle collateral.

              Also Read: Documentation for Loan Against Property - What You Need to Know
 

Difference Between a Home Loan and Loan Against Property

Check out the table below to understand the key differences between Home Loans and Loans Against Property.
 

Home Loan	Loan Against Property
To finance purchase or construction of residential property	Helps obtain funds against the value of an existing property
Property that is being purchased or constructed serves as security	The property that you have is used as collateral
Interest rates are generally lower compared to Loan Against Property	Interest rates are usually higher than Home Loan but lower than other loans
Repayment Tenure: Longer repayment tenure of up to 30 years	Shorter repayment tenure of up to 15 years
Tax Benefits is available for both principal and interest components	Tax Benefits can be availed only on interest component
Loan to Value Ratio: Up to 80% of the property value	Loan to Value Ratio: Up to 60% to 75% of the property value
Eligibility is based on credit score, income, age, and property value	Eligibility criteria mainly based on property value and income
Documentation: Property papers, identity proof, income proof, bank statements, etc.	Documentation: Property papers, identity proof, income proof, bank statements, etc.

Are you wondering how a home loan is different from a loan against property? Well, here’s everything you need to know.
 

Usage

Both the loan types serve different purposes. For instance, home loans are offered strictly to purchase a house. Whereas, there is no restriction on the terms of use of the loan amount from a loan against property. The borrower can mortgage his/her property for funds to meet personal as well as business requirements.  
 

Rate of Interest

On comparing home loan vs loan against property interest rate, you will notice that there is not much difference. Since both loans are backed by high-worth property, the risk of lending is almost eliminated. Therefore, the applicable interest rate on loans against property and home loans are much lower than other loan products.  
 

Loan-to-Value (LTV)

In a home loan, a borrower can get finance up to 90% of the value of the property. On the other hand, the LTV ratio of loans against property is up to 75% of the property value. Further, the property valuation is done as per the standards of the lender and value may differ from the market value. However, when it comes to the loan value, LAP is available for the amount ranging from Rs 50 lakh to Rs 5 crores, which is much higher than what lenders offer under a home loan.
 
Also Read:How to Use a Loan against Property EMI Calculator
 

Tenure

The tenure for both home loans and loans against property is long due to its high loan value. Typically, a home loan has a minimum loan tenure of 5 years and a maximum tenure of up to 30 years.

Whereas, a loan against property has a flexible repayment tenure, having a maximum loan tenure of up to 15 years. The main advantage of a loan against property is that it is available to individuals aged between 25 years and 75 years. Meanwhile, most lenders reject an application for a home loan if you are over 60 years old. 
 

Tax Benefits

Another difference between a home loan vs. a loan against property is tax benefits. A home loan allows you to claim exemption on interest payment under Section 24 of Income Tax Act 1961, while Section 80C allows you to claim an exemption on principal payment.

When it comes to a loan against property, a LAP does not offer tax benefits in normal circumstances. However, borrowers can claim an exemption under the Income Tax Act of 1961 in two situations.
 
• If the funds from loan against property are used for meeting non-capital business expenditures, you can receive a tax benefit under Section 37(1) of the Income Tax Act 1961. To get tax exemption, don't forget to highlight the LAP usage under the expense section of the business profit and loss statement.
 
• If you are a salaried individual and are utilising the LAP funds for purchasing another residential property, you can get tax benefits under Section 24 (B) of the Income Tax Act 1961. However, the maximum allowed deduction is capped at Rs 2 laky.
 
Also Read:Loan Against Property vs. Personal Loan
 

Documentation Process

When doing a home loan vs mortgage loan comparison, don't avoid the documentation process. Both LAP and home loans require distinct paperwork, the only similarities being KYC and evidence of income. Because of the time taken in determining the property's current market value, the approval process for LAP is slightly longer, probably a day or two, than a mortgage loan. While in home loans, you may easily find lenders that have ties with builders, and due to this, the approval process is quick and simple.
 

Mortgage Loan Vs Home Loan: Which one to Choose?

 
The choice between a home loan and a loan against property is very simple and straightforward. A home loan is specifically given to purchase a house and a loan against property is more like a type of secured personal loan, where a borrower has the flexibility to use it as per their requirement. To understand better, here’s a quick comparison of Home Loan vs Loan Against Property, also known as Mortgage Loan. Home Loans have lower interest rates and longer repayment tenures, making them ideal for a long-term investment in real estate. On the other hand, a Mortgage Loan has higher interest rates and shorter repayment tenures, making it a suitable option for those needing immediate funds. So, it solely depends on your specific need, as each loan serves a different purpose. 

You can take a Home Loan if you’re buying a home. You can take a Mortgage Loan if you require funds for any personal or business purpose against your residential or commercial property as collateral. 

Disclaimer: This post was first published on 12 March 2020 and has been updated for the latest information, freshness, and accuracy.

FAQs

 

Q: Is a Home Loan the same as a Mortgage Loan?

A: No, Home Loans are taken to finance the purchase or construction of a residential property, while Mortgage Loans are taken against an existing property as collateral. Home Loans have an intended purpose, while Mortgage Loans can be used for any legal purpose. 

Q: Can we convert a Mortgage Loan to a Home Loan?

A: No, it is not possible to convert a Mortgage Loan to a Home Loan. However, borrowers can opt for a balance transfer to get lower interest rates on their existing loan.