Home loan vs. Loan Against Property – What’s the Difference?

Both home loans and Loans against property (LAP) can help in fulfilling the monetary requirements of a borrower. The house being purchased can be used as security for home loans while any property owned by the borrower can be pledged to avail a loan against property.There are many other differences between the housing loan and LAP, including the following:

• Purpose of Loan: While comparing home loan vs loan against property , the fundamental difference lies in the purpose of the loan. Home loans can be taken only to buy a new house, plot, or purchase an under-construction property. LAP also called mortgage loan can be used for any purpose including funding higher education, purchase of a vehicle, or planning a wedding, except for speculative purposes.
• Interest Rates: The interest rate is another differentiating factor between a housing loan and loan against property. Home loan interest rates are typically lower compared to that of LAP. Moreover, schemes by the government on housing loan such as PMAY help in more savings when taking a home loan.
• Loan Tenure: The loan tenure for repayment of home loans can be up to 30 years. The loan tenure for a mortgage loan, however, is lower and can be up to 20 years.
• Loan Amount: One of the key differences between home loan and property loan is the maximum loan amount. The Loan to Value (LTV) ratio of home loans can be up to 90% of the property's market value as assessed by the lenders. The LTV of loans against property can be in the range of 55-70% of the property value. The current market value of the property is dependent on various factors like the property’s age and location in both types of loans.
• Tax Benefits: Home loans are eligible for tax benefits for both the principal and interest components. A principal amount of up to Rs 1.50 lakhs is eligible for tax deduction under Section 80 C of the Income Tax Act. The interest paid on home loans can also enjoy tax benefits under Section 24(b). In the case of home loan against property , the availability of tax benefits is dependent on end-usage. If the mortgage loan was used for business purposes, the interest and the incidental costs could be claimed for benefits under Section 37(1) of the Income Tax Act. However, if the loan was used to purchase a house, the interest can be claimed for benefits under Section 24(b).

Home loans are taken for the specific purpose of buying a house while loan against property can be used for varied purposes. Home loans can offer better interest rates, LTV, and tenure, while the lack of end-usage restrictions is a prime advantage of loans against property.

Home Loan vs Loan Against Property

Home Loan

A home loan is a financial loan used to buy a house or other property. It can be used to purchase a single-family house, condominium, apartment, or any other type of real estate. Home loans are commonly offered by banks and other financial institutions.Typically, there are two types of interest rates levied on a home loan. You can choose the type of interest based on your needs- fixed-rate loans and floating-rate loans.
Fixed-rate loans have set interest rates. The interest rate doesn’t change during the repayment term. Floating-rate home loans have interest rates that change over time according to various factors, such as the repo rate.

Loan Against Property

A loan against property is a secured loan where you use your property as collateral.

Typically, most lenders will ask you for proof of income when you apply for a loan against property. However, there are a few ways to get a loan against a property if you don’t have proof of income.Here are the tips you can follow-

• You can submit the loan application with a co-applicant that has proof of income.
• You should explain why you don’t have income proof.
• You can select a lower loan-to-value rate.

Here are some benefits of a loan against property-

• As a loan against property is a secured loan, you can borrow it at a low-interest rate.
• Typically, lenders tend to allow longer loan tenures.
• The loan amount depends on the market price of the property. However, you can apply for a lower loan amount. Hence, a loan against property provides flexibility when selecting the loan amount.

The maximum loan tenure varies from one lender to another. However, most lenders allow loan tenure to be up to 30 years.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.