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Home loan vs Loan Against Property
People require loans for a variety of reasons. There are so many similar kinds of loans offered that it’s easy to get perplexed. A home loan and a loan against property (also known as a mortgage loan and LAP) are two examples of this. Some people confuse the two.
Home Loan
A home loan is actually a loan you’re taking to buy a ready-to-move-in house, a property under construction, or a plot of land on which you plan to create a house. This is often a secured loan offered by banks or housing finance companies. Therefore, the buyer must pay a down payment. The lender charges a fixed or floating rate of interest on the loan. Therefore, the buyer must repay the loan in monthly EMIs. With each EMI payment, the borrower builds equity in the property. This ultimately leads to complete ownership upon finalizing the loan through full EMI payment. If the borrower defaults on EMIs, the lender can auction it off to recover losses.
Loan Against Property
A loan against property is actually a mortgage loan. In this, a borrower can pledge his existing, self-owned property for a sum of amount that equals a particular percentage of the market price of the property he owns. He must hand over the property documents to the lender until the time he repays the loan. Therefore, the loan, just like the home loan, is often repaid in EMIs. EMIs consist of the principal loan amount taken and the rate of interest. If the borrower defaults on repaying the loan, the lender can sell the pledged property to recover his investment.
Let us look at the differences between the two:
|
Basis |
Home loan |
Loan against property |
|
Usage |
This loan is used to purchase homes. Not to be used for business. |
These loans are multi-purpose loans. Can be used for both business and personal use. |
|
Borrower’s requirements |
The value of the home loan depends on the borrower’s income and repayment capacity. The lender also takes into account the borrower’s age, education, number of dependents, job, spouse’s salary, debt, assets, credit history, and stability of occupation. |
The value of the loan against property would be judged based on the value of the property used as collateral. The maximum loan amount that the borrower can receive depends on the current market price of the property. Apart from this, the lenders also take into account all the factors mentioned under the requirements for a home loan. |
|
Collateral |
A home loan is sometimes a secured loan that is supported by a down payment by the borrower. |
A loan against property is a secured loan where the borrower’s property is used as a mortgage in exchange for the loan. |
|
Tax benefits |
There is tax exemption under section 24 (b) and section 37(1) for home loans. |
Interest paid on loan against property is tax-deductible. |
|
Term |
The term of a home loan can go up to 30 years |
A loan against property can go up to 15 years |
|
Interest rate |
Low interest rates compared to loans against property. The Reserve Bank of India and the Indian government take efforts to make housing affordable to all. |
Higher interest rates than home loans. Most banks and lenders think that there is a higher chance of default on loans against property. |
|
Value of loan |
Lenders provide up to 90% of the loan amount. |
Lenders like banks normally lend 60%-65% of the mortgaged property’s current market price as loan value |
|
Ownership |
If a property is used as collateral, the lender continues to be the owner of the property till the equated monthly instalments are paid by the borrower. |
The documents of the property are handed over to the lender when the loan is purchased. Once the borrower repays the loan through EMIs the documents are handed back. |
|
Top-up option |
Home loans do not have the option of receiving more funding |
Loans against property have the option of receiving more funding on your existing loan. |
Summing Up
The decision to choose between a Home Loan and Loan Against Property largely depends on your requirement. If you are looking to buy, construct, or renovate a home and can benefit from the tax deductions, a Home Loan is likely the better choice. On the other hand, if you need funds for diverse personal or business needs and have an existing property to mortgage, LAP could be more suitable.
However, we at Exemplar are always there to guide and assist you through the nitty-gritty of the lending world. Do not hesitate to contact us. Your financial security is our priority!
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Frequently Asked Questions
Can we convert a mortgage loan to a home loan?
Generally, it’s not possible to directly convert a mortgage loan (LAP) into a home loan because they serve different purposes and have different terms. However, one can use a LAP to buy or construct a
What are the tax benefits available for a home loan or a loan against property?
Home loans offer tax deductions on both the principal and interest under various sections (like Section 80C, and Section 24) of the Income Tax Act in India. LAP generally doesn’t offer tax benefits un
Can I loan against property without income proof?
It can be challenging to get a loan against property without income proof as lenders assess repayment capacity based on income. However, some lenders may consider other factors like property value, cr