When faced with a dearth of financial resources, individuals often turn to loans offered by banks and NBFCs to fund their economic affairs. Unfortunately, the terms home loan and loan against property (also known as LAP or mortgage loan) are often used interchangeably, which is, in fact, incorrect. As both words include a similar aspect of real estate, it creates confusion in the minds of potential borrowers. The following article discusses similarities and differences between the two types of loans.
Loan against property vs. home loan key distinctions:
1) Interest Rate
One of the most critical factors that determine an applicant’s decision to sign a loan agreement is the rate of interest offered by the said bank or financial institute. In the case of a home loan, the interest rate figure generally tends to be lower, ranging from 8.5 -12%. Since the government and RBI aim for affordable housing schemes, home loans have been included in the priority sector lending. On the other hand, a loan against property is given at a higher interest rate ranging between 10-15%. This is mainly due to the unrestricted utility of funds and increasing defaults in the case of mortgage loans. To better understand how to reduce home loan interest, you can calculate the necessary values using an Online EMI Calculator.
2) Loan Tenure
Since home loans and loans against property are both availed to secure a significant amount of money, they are long-term debts. In any case, parameters such as credit score, age of the applicant, and property value determine the loan duration. For example, a home loan can be secured for a maximum tenure of 30 years. On the contrary, mortgage loans have a shorter tenure of 15 years.
3) Utility of Funds
One of the significant aspects that differentiates a home loan from a LAP is the end use of the secured capital. A home loan or housing loan can only be utilized to finance the construction, redecoration, or purchase of a piece of land. However, you must pledge your existing plot or property as collateral to obtain funds through a mortgage loan. In this case, the loan amount can be used for various purposes such as financing someone’s education, meeting wedding expenses, fulfilling business obligations, or funding a medical emergency.
4) Loan-to-Value Ratio (LTV)
The loan-to-value ratio refers to the amount of loan that financial institutions can grant to you depending upon the property value. This is a fundamental figure that helps lenders assess the risk quotient. As mentioned above, as home loan is considered priority sector lending, the maximum percentage of the allowed loan amount is 90%. Home buyers generally cover the rest up as a down payment. Meanwhile, a loan against a property is granted a maximum of up to 60% of the property value. It is also important to note that banks always perform an assessment test of the property in case of a LAP.
5) Tax Benefits
Apart from knowing how to reduce home loan interest, a major advantage of securing a housing loan is the tax benefit attached to it. Under Section 80 C and Section 24 of the Income Tax Act, Income Tax benefit is available on Principal repayment (under the overall limit of Rs 1.5 lakh) and for payment of interest up to Rs 2 lakh. However, in the case of a loan against property, tax benefit eligibility is available only in a few circumstances where the loan is used to fund business practices or to buy another property.
After considering the chief characteristics of a home loan vs loan against property, it is safe to say that opting for a home loan is the wiser choice when you wish to finance your housing needs. Nevertheless, when you have to carry out other monetary responsibilities, availing a loan against property is a much safer option than a personal loan with high interest rates latched to it.