Difference between Home Loan and Loan Against Property

Individuals require loans for a variety of reasons. While some people avail loans to acquire a car, property, and other high-value items, some people take it to start a new business or to repay their existing debts. Given the varying circumstances, many different types of loans are offered by lending institutions in India.

However, the availability of numerous loan products often confuses people. For example, many of them do not know the difference between a home loan and loan against property and use these two terms interchangeably. Let us find out what these two terms mean and what are the major differences between them.

What is a Home Loan?

A home loan is exclusively designed to help people purchase a house or a piece of property. Home loans can be availed to buy a ready-to-move-in house, or an under-construction property, or a plain plot of land on which a house can be built. Interest rate on home loans can be fixed or floating, and the borrower needs to repay them in monthly EMIs.

What is a Loan Against Property?

A Loan Against Property (LAP) is essentially a loan which is taken by keeping a property as mortgage. Therefore, it is also known as mortgage loan. To apply for LAP, the borrower needs to pledge his/her existing, self-owned property as security. In return, the lender lends him/her a certain percentage of his/her property’s market value.

Home Loan vs Loan Against Property: Now, let us learn the differences between these two types of loans based on some significant factors:

• Purpose

As mentioned above, a home loan can be used only for purchasing a ready-to-move-in house or an under-construction housing property. It can also be used to buy a plot of land and construct a house on it. On the other hand, there is no end-usage restriction on a loan against property. It can be used for any purpose, ranging from business to personal requirements.

• Interest Rates

The interest rates levied on loan against properties are slightly higher as compared to home loans. This is because of the Government’s initiatives to provide affordable home loans to all citizens of India. Typically, interest rates on LAPs are 1 to 3 percentage points higher than home loan interest rates.

• Loan Tenure

Both loan against property and home loans are high-value loans and hence, come with long tenures. However, tenures of LAPs are usually lower than home loan tenures. Typically, loan against properties come with a tenure of up to 15 years, whereas the tenures for home loans can be as high as 25 to 30 years.

• Loan to Value Ratio

In case of home loans, the borrower can avail financing of up to 90% of the property’s market value. On the other hand, the maximum loan amount that is sanctioned in case of a loan against property is 70% of the mortgaged property’s market value. The maximum loan amount that can be sanctioned for a property can vary from lender to lender.

• Processing Fees

Lenders usually charge a higher percentage of loan amount as processing fees in case of a loan against property. Typically, for LAPs, lending institutions charge a processing fee of 1.5% to 2% of the total loan amount. Whereas, in case of a home loan, processing fee is usually 0.8% to 1.2% of the loan amount.

• Eligibility Criteria and Documents

Home loan eligibility criteria and documentation is simple since it usually involves purchase of new properties. On the other hand, eligibility, and documents for loan against property vary from lender to lender. In fact, many lenders prefer to physically inspect a property before sanctioning a loan against it.

• Tax Exemptions

While there are no tax exemptions on mortgage loans, a borrower can avail tax benefits of up to ₹ 1.5 Lakhs (U/S 80C of the Income Tax Act 1961) in case of a home loan. Additionally, the interest paid on home loans are also eligible for tax deductions under section 24(B).

In a Nutshell: As you can see, a home loan and loan against property are two entirely different products. While home loans are taken specifically for the purpose of buying or constructing a house, a loan against property can be used for varied purposes.

You can avail a variety of loans, including Home Loans and Loan Against Property from Grihum Housing at competitive interest rates. For more details, just fill up an online form by clicking here and our representative will get in touch with you.