What is the Difference Between a Home Loan and a Loan Against Property? 

What is the Difference Between a Home Loan and a Loan Against Property? 

Anyone who has dealt with loans and real estate has definitely encoutered terms like home loans and loans against property. These terms often create confusion. These financial products serve distinct purposes but might seem similar at first glance. This blog aims to unravel the differences between them, offering clarity to support individuals in making informed financial decisions. 

Understanding Home Loans 

Home loan serves as a common financial tool used for purchasing residential properties. These loans are tailored to assist individuals in acquiring their dream homes. They typically cover a significant portion of the property’s cost. Borrowers are required to repay the loan in monthly instalments (EMIs) over a specified tenure. Home loans usually have a lower interest rate than loans against property. Eligibility for home loans depends on many factors, like income, credit score, and property value. 

Loan Against Property (LAP) 

Mortgage loans or Loans Against Property (LAP) use an owned property as collateral to secure a loan. LAP is a multi-purpose loan and offers greater flexibility as the funds obtained through it can be used for diverse financial requirements, such as business expansion, education, weddings, or any other personal needs. Loans against property grant you around 60% of the property value. 

Key Differences Between Home Loans and Loans Against Property 

The primary differences between these loan types lie in their purposes, collateral, eligibility criteria, and usage. Here are all the major differences between the two financing options. 

Purpose of the Loan 

Home Loan: This is specifically used for purchasing or constructing a new home. The property in question does not belong to the borrower at the time of taking the loan. 

Loan Against Property (LAP): In this type of a loan, the borrower mortgages an existing property, which can be residential or commercial, to meet personal or business financial needs. 

Interest Rates 

Home loans generally have lower interest rates than LAP, reflecting the lower risk perceived by lenders when the funds are used for housing, which is a priority sector for the government. 

LAPs have higher rates as they are considered riskier; they can be used for various purposes and are not restricted to residential investment. 

Repayment Tenure 

Home loans provide longer repayment periods, often up to thirty years, due to their larger size and the nature of the investment. 

LAPs generally offer shorter tenures, reflecting their different financial structures and risk assessments. Practically, the maximum tenure for a loan against property depends on the lender’s policies. 

Tax Benefits 

Home loans come with significant tax benefits. Borrowers can claim deductions on the principal as well as the interest amount under various sections of the Income Tax Act. 

LAPs do not offer direct tax benefits unless the loan is explicitly taken for the construction or purchase of a new property. 

Documentation and Approval 

Obtaining a home loan usually involves simpler documentation related to the property being purchased and the borrower’s financial history. 

LAP requires more comprehensive documentation as it involves the mortgaging of an existing property, which may include additional checks to confirm the property’s title and value. 

Top-up Facility 

Both loan types generally offer top-up facilities, allowing borrowers to access additional funds on their existing loan under certain conditions. 

Selecting the Right Loan Option 

Choosing between a home loan and a loan against property (LAP) depends on your financial goals. Opt for a home loan if you’re looking to buy or construct a new house, taking advantage of lower interest rates and significant tax deductions. 

Conversely, choose LAP if you need funds for diverse personal or business needs and are prepared to mortgage an existing property despite higher interest rates and limited tax benefits. Assess your funding requirements, repayment capability, and the intended use of the loan to make the right decision. 

Conclusion 

Understanding the nuances between home loans and loans against property is vital for navigating real estate financing. Each loan type caters to distinct requirements and serves unique purposes. Making an informed choice involves considering individual financial goals and eligibility criteria and comprehending the differences between these financial products. 

FAQs: 

  1. What is the difference between a PL and a home loan? 
    Personal loans (PL) cover various personal needs, while home loans are specifically for buying or building a home. PLs are unsecured with higher rates; home loans are secured against the property, offering lower rates for longer terms. 
  1. What type of loan is a mortgage? 
    A mortgage is a loan secured by real estate/property. 
  1. What are the differences between a loan against property and home loans? 
    A loan against property differs from home loans primarily in its maximum loan amount and the utilisation of funds. Compared to home loans, a loan against a property usually offers higher maximum loan amounts, leveraging owned property as collateral. Additionally, while home loans are typically utilised for property purchase or construction, a loan against property provides flexibility in using the funds for various needs, such as business expansion, education, marriage, or any other personal need. 
  1. How does the market value of the property affect repayment in a loan scenario? 
    The market value of the property plays a crucial role in loan repayment. When a buyer secures a loan against a property, the lender evaluates the property’s market value to determine the loan amount. In case of default, if the buyer must repay the loan, the lender might consider the property’s market value to cover the outstanding balance through asset liquidation or sale. The market value influences the lender’s risk assessment and the buyer’s repayment obligation.
Suhas Gore
Suhas Gore

Suhas has 25 Years of experience in MSME lending having started his career as a management trainee with EFL. He has spent around 18 years in Sales and Product after which he is heading the Credit & Risk function for the last 7 years.

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