Investing in real estate is one of the most effective ways of maintaining a stable financial portfolio. However, financing property-related needs is a mammoth task in itself. When it comes to financing your property-related needs, there are two common options: home loans and loans against property (LAP). It’s quite easy to get confused between the two and more often, we find these terms being used interchangeably. However, they are starkly different. While both involve real estate as collateral, there are certain differences that distinguish them. Let’s understand the difference between home loans and loans against property.
Purpose
Home Loan: This is a secured loan option usually opted by homebuyers who want to buy a plot of land, or a ready-to-move house, or finance an under-construction property. A home loan can also be used to renovate a house, carry out some major improvements or extensions to the property. It can be availed only to purchase or finance real estate.
Loans Against Property (LAP): Such loans are also called mortgage loans. It is a secured type of loan that allows borrowers to avail their financial needs by mortgaging their property. In times of a medical emergency, or funding a business, or just about any other major financial crisis in life, a mortgage loan is a common way out. Lenders can mortgage property in exchange for the sanctioned loan amount. However, it will depend on the value of the mortgaged property.
Usage
As mentioned above, home loans can be used only to finance or purchase real estate. Loan against property, on the other hand, can be used for any purpose. Think of financing a marriage, medical emergency, buying a vehicle, debt consolidation, or any other financial emergency – mortgage loans can prove useful in any such situation.
Eligibility Criteria
The eligibility criteria for both kinds of loans differ slightly. Eligibility for home loan depends on the borrower’s income, age, credit score, and employment status. In contrast, the eligibility for claiming a mortgage loan, in addition to the previously mentioned criteria, is also dependent on the value of the property. The borrower’s repayment capacity and the market value of the property are key factors in determining how eligible the borrower will be.
Loan Amount
Before applying for a home loan, it must be noted that the financial institution always examines the financial status – income and job security of the applicant. On the other hand, while applying for a mortgage loan, the financial institution examines the value of the property that the applicant will be mortgaging. The Loan to Value (LTV) ratio of home loans can go up to 90% of the property’s market value. The LTV ratio in the context of mortgage loans lies in the range of 55% and 70% of the market value of the property.
Interest Rate
Interest rates in the case of home loans are generally lower compared to mortgage loans, standing at 8.7% to 9.1% per annum. Several state-sponsored subsidy schemes, such as the Pradhanmantri Awas Yojana (PMAY) aid in the overall process of availing a home loan.
Mortgage loans have a comparatively higher interest rate. The reason for this is the multi-faceted nature of mortgage loans, which poses a greater risk to lenders than in the case of home loans. Their interest rate lies in the range of 10.50% to 10.95% per annum.
Tenure
The loan tenure of both types of loans is usually long. However, in comparison, home loans generally have a higher tenure, up to 30 years. This tenure is sufficient enough for homebuyers to repay the loan efficiently, usually through EMIs, making it an affordable and cost-savvy option.
Mortgage loans mostly lie somewhere in the tenure of 15 to 20 years. As the tenure is shorter, the repayment must be done in higher EMI values.
Tax Benefits
When it comes to tax benefits, home loans are eligible for a tax deduction of up to Rs. 1.50 Lakh on the principal amount under Section 80C of the Income Tax Act. Under Section 24(b), the interest paid on home loans is also eligible for tax benefits.
In contrast, loans against property enjoy lesser tax benefits. Moreover, the availability of tax benefits in their case depends on the end-usage of the loan. If the loan was used for business purposes, Section 37(1) grants certain benefits in the interest and incidental costs. However, if the loan was used for personal purposes, no tax benefits can be claimed.
Documentation Process
Home loans have a generally shorter and simpler documentation process. Financial institutions can take up to 15 days to complete the verification and documentation process. On the contrary, mortgage loans take longer to process as the financial institution must complete a property check, verify the property ownership details and other formalities before approving the loan. This might take several weeks, or even months, depending on the financial institution and the borrower.
Summing Up
Both home loans and loans against property serve different financial needs. While a home loan is ideal for purchasing or constructing a home, a loan against property is a multi-purpose option. It’s essential to carefully assess your financial requirements, repayment capacity, and the specific terms and conditions of each loan type before making a decision. Consulting with a financial advisor can also help choose the best option tailored to your needs.
FAQs
What is the Difference Between a Loan Against Property and a Housing Loan?
A home loan is specifically designed for buying a house, plot, or an under-construction property. In contrast, a loan against property can be used for a wide range of purposes, including marriage, purchasing a car, medical emergencies, debt consolidation, or business needs.
How is the Loan Amount Determined for a Home Loan Versus a Loan Against Property?
For a home loan, the loan amount is typically based on the property’s value and the borrower’s repayment capacity, with lenders usually offering up to 80-90% of the property’s market value. In the case of a loan against property, the loan amount is determined by the property’s market value and the lender’s policies, usually providing up to 50-70% of the property’s market value. The lower loan-to-value ratio for loans against property reflects the higher risk for lenders.
Can You Claim Tax Benefits on a Loan Against Property, if Used for Personal Purposes?
No tax benefits are available if the loan is used for personal purposes.
Why are Interest Rates for Loans Against Property Generally Lower Than Unsecured Loans?
Interest rates for loans against property are generally lower than those for unsecured loans because they are secured borrowing options. The lender’s risk is reduced as they can recover losses by making a legal claim on the property used as collateral. This security allows lenders to offer more favourable interest rates.
