A ‘home loan’ and a ‘loan against the property’ are two different types of loans that a borrower can choose. However, most of the time, these two terms are used interchangeably, which creates confusion in borrowers’ minds. People new to loans and other credit products often interpret these two loans as the same. One similarity creates grounds for confusion; both the loans come under the ‘secured loan’ category. The underlying security in home loans vs loans against property cases which is important to note that there are many differences between the two.
Read on to learn more about home loans vs loans against property.
What is a home loan?
A home loan can be defined as a type of secured loan taken to finance the purchase of a house. The underlying collateral, in this case, is the house itself. Home loans are the preferred option for purchasing property since the cost of the property is serviced by the loan amount, the interest rate is low, and the loan tenure is flexible.
Homeowners repay the total borrowed amount through convenient EMIs. In most cases, homeowners applying for a home loan have to pay a down payment amount, usually in the range of 10% to 25% of the total amount. The down payment amount can vary depending on the lending institution’s policies and the borrower’s credit profile.
Understanding loan against property
A loan against property is also a type of secured loan offered against an asset pledged as security by the borrower. The asset pledged here can be any property which the applicant already owns and is free of any mortgage. For example, the property could be land, houses, commercial property, etc. This asset will remain as collateral with the lending institution until the borrower repays the entire loan amount.
In case of default, the lending institution reserves the right to sell off the asset and recover the loan amount (as per the terms and conditions of the loan). The loan amount sanctioned is usually less than the actual value of the property pledged. In most cases, it is around 60%-70% of the property’s value offered as collateral.
How do home loans differ from the loan against property?
There are many differences between a home loan and a loan against property. Let us take a look at some crucial differences that differentiate them.
- Usage of funds
Home loan borrowers have restrictions on the usage of funds. The loan amount obtained can only be used to finance the purchase of a house, residential or commercial plot, and an under-construction property. However, a loan against property does not impose any restrictions on these funds. It is a multi-purpose loan that can be used to meet any type of financial obligation. You can use funds for various activities, including education fees, managing wedding expenses, purchasing a new house, etc.
- Interest rates
The interest rate charged for secured loans is usually on the lower end. However, the exact interest charges for these two loans can differ. Usually, the interest rate charged for a loan against property is higher than the interest charged for a home loan. Lending institutions assume that the default rate for loans against property is higher than for home loans. Since it is a multi-purpose loan, borrowers might use it for financing personal expenses that might not generate revenue or save income.
- LTV ratio
The Loan to Value (LTV) ratio is used for computing the percentage of property’s value offered as a loan to borrowers. Lending institutions will never lend an amount higher than the property’s current value at the time. It might add to the risk quotient. The LTV in case of loan against property is usually lower when compared to a home loan.
- Loan tenure
The loan tenure for home loans can vary in the range of 20 to 30 years, depending on the lending institution’s policies. However, in the case of a loan against property, the loan tenure is usually between 15 to 20 years. Therefore, home loans have a higher loan tenure as compared to the loan against property.
- Tax exemptions
One of the most significant differences between home loans and the loan against property is the underlying tax exemptions. Home loans offer tax benefits to buyers as per Section 24 and Section 80C of the Indian Income Tax Act. However, tax exemption benefits are not available for repayments made towards a loan against property.
The above points clearly define the salient differences between a home loan and a loan taken against a property. Choose the one you require.