Introduction to Home Loan vs Loan against Property
All of us require credit facilities for various purposes during a lifetime. There are so many loan products available in the market that we might get easily confused.
Most of us have confusion when we hear about home loans and loans against property. And that is quite obvious due to the similar finance terminology used for both the loan facility. Though they sound very similar, the functioning, features, and benefits of both are quite different.
These two types of loans are entirely different in their offering to the borrower. A home loan is a credit facility taken to purchase or construct a new house; the land or the property does not belong to the borrower yet.
While a loan against property is a loan taken by keeping your existing property as security and the amount availed can be used for various purposes.
The essential point of difference between home loan and loan against property:
Purpose of the loan
The fundamental difference is in the purpose for which the funds are required. A home loan is usually availed to purchase a home, plot, or a property under construction.
On the other side, a loan against property allows mortgaging your existing property in exchange for money required for various reasons such as business expansion, funding your children’s education or wedding, medical expenses; etc.
Quantum of Loan amount
Buying a home is a crucial decision in one’s lifetime. Buying a house is expensive, and a lot of money is required to get your own house.
Home loans grant a higher percentage in comparison to the value of the property, i.e. up to 90%. Whereas for a loan against property, they sanction loan amount up to 60-70% of the property value.
Loan to Value ratio (LTV)
The loan to value ratio explains the ratio of the loan amount to the value of the asset put as security. To avail a home loan, the borrower has to pay the down payment.
This is in the range of 10-30% depending on the bank and the credit profile of the borrower. However, as the loan against property is a high ticket loan, the loan to value ratio is lesser than that of a home loan. In the case of loans against property, lenders require higher margin money in the range of 25-40%.
Tenure of the loan
The tenure for both home loan and loan against property is significant. Usually, the term for home loans is for 20 years.
Loan against property is also a high-value loan and requires many years to pay back. They typically come with a tenure of 15 years. The borrower chooses the term of the loan as per their repayment capacity.
Rate of Interest
The home loan is the loan facility that is considered under priority sector lending for which the rate of interest is less. Currently, the rate of interest for home loans is decided by the marginal cost of funds-based lending rates (MCLR). The Interest Rate for home loans is in the range of 8% to 13% depending on the borrower’s profile.
The Interest Rate for a loan against property is higher than that of home loans. This is because the chances of defaulting on loans against property are more increased.
Tax exemption on loan
A home loan borrower can get a tax deduction up to Rs. 1.5 lakhs on principal repayment, under Section 80C of Income Tax Act.
The borrowers can also get additional exemption on tax up to Rs. 2 lakhs on the interest amount under Section 24(b).
The tax advantage in case of a loan against property depends on the end-user. If the loan amount is used for business purposes; the interest and other fees can be claimed as per Section 37(1) of the Income Tax Act.
If the loan amount is used to buy a house, then the interest can be claimed for tax exemption under Section 24(b).
Further visit: 6 Best Tips To Get Mortgage Loan Approved Instantly
Nature of the property
The purpose of availing the loan could be any, like purchasing land or an accomplished apartment or renovation; a housing loan is granted only for residential purposes.
The loan against property can be taken by keeping a residential, commercial, or industrial property as security. The property documents returned only after the complete payment of the loan.
Documentation and process of approval
Both the loans involve putting an immovable property as collateral; thus, there is extensive documentation required.
Documents required for a loan against property is quite vast, and changes based on the type of property put as collateral. Due to a lot of legal issues involved, the process of approval for a loan against property is longer than that of a housing loan.
A home loan is a suitable option for individuals who want to purchase a readymade house or an under-construction property. Whereas, a loan against property finances multiple requirements of the borrower.