Difference between Home Loan and Loan Against Property

Home loans are high-value loans that involve an elaborate process of application and approval. Many people use the terms loan against property and home loan interchangeably. However, the truth is that these two terms are entirely different from each other. Let us try to understand what these terms mean and the differences between them.

What is a home loan?

A home loan is a type of loan that you may take to buy a house that is ready to move in, a plot of land on which you are planning to build a house or a property under construction. This is a type of secured loan that requires a down payment. These loans are offered by banks and housing finance companies with a floating or fixed rate of interest. The homeowner has to repay the loan amount through monthly EMIs. The lender holds the property documents and stays the owner of the property till the borrower pays off the loan amounts. After this, the ownership of the property is transferred back to the borrower. If the borrower fails to pay back the loan amount or defaults on EMIs, the lender has the right to auction off the property to recover the losses.

What is a loan against property?

 The primary reason for the confusion between loans against property and home loans is the fact that both are types of secured loans. However, this is as far as the similarities between the two go. A loan against property is a type of mortgage loan in which the borrower can pledge an existing property owned by them for an amount of money equal to the market value of the property at stake. The borrower has to hand over the documents of the property to the lender till he is able to repay the entire loan amount. The amount can be paid back in the form of EMIs, which comprise the principal loan amount along with the interest. Just like in home loans, the lender has the right to auction the pledged property and recover his losses in case the borrower fails to pay back the amount on time or defaults on the EMIs.

Home loan vs loan against property

1. Interest Rates

The difference between the interest rates of home loans and loans against property is substantial. Home loan interest rates are usually lower than the interest rate of a loan against property. This is mainly due to the lenders’ belief that borrowers are more likely to default on loans against property. Not only this, the RBI and the Government of India mandate banks to charge a lower interest rate on home loans to increase property investment in India and make housing affordable for all the citizens of India.

2. Loan-to-Value Ratio

The lenders evaluate the borrower’s income, job security, credit score, etc., before approving their loan. In the same way, they will evaluate the value of the concerned property before approving a loan against it. Regarding a home loan, you can get up to 90 per cent of the property’s value as the loan amount. On the other hand, if you are applying for a loan against property, you can get a maximum credit amount equivalent to 60% of the property’s value in the market currently.

3. Tenure

There is a huge difference between the tenures of home loans and loans against property. Home loans are offered for a maximum period of 30 years. On the contrary, the maximum tenure offered for getting a loan against property is usually 15 years.

=> Read Also:- Essential Amenities for Home Buyers

4. Usage

The home loan amount can only be used to buy a home, a property under construction, and a plot of land. On the other hand, a loan against property is a lot more versatile. The loan amount obtained from this type of loan can be used to fund any personal expenses such as purchasing a car, paying off debt, funding a wedding, expanding your business, or for a medical emergency.

5. Documentation

The documentation process of home loans and loans against property is also quite different from each other. When it comes to a home loan, the documentation process is relatively simpler, and the entire process of documentation and verification takes around 15 days. However, when it comes to loans against property, the process takes a lot more time and is much stricter. The lenders evaluate all documents of the property, such as the sale agreement, occupancy certificate etc., to ensure that there are no legal disputes related to the property.

6. Taxation

Your home loan entitles you to a tax benefit under Section 80C of the Income Tax Act of India, in which you can get a deduction of up to 1.5 lakhs on your loan amount. However, no tax benefits are available for loans against property. If you get a loan against property to purchase a new house, you can avail of a tax benefit under Section 24 of the IT Act.

7. Top-up facility

Most banks and money lenders offer top-up benefits when you get a loan against property. This means that you can get more funds against your existing loan amount. This gives you more flexibility and allows you to use the loan amount to fulfilling multiple requirements. However, this facility is usually not available with home loans. Some financial institutions may offer top-up benefits based on individual cases after thorough evaluation.

Category	Home Loan	Loan Against Property
Interest Rate	8.70% onwards	9.50% onwards
LTV Ratio	Up to 90% of the property value	Up to 60% of the property value
Purpose	To buy a house, property under construction, or plot	For personal use or business purpose
Tenure	Up to 30 years	Up to 15 years
Processing Fee	Up to 1% of loan amount along with applicable taxes	Up to 1% of loan amount along with applicable taxes
Tax Exemption	Exemption under section 80C for principal and 24 for interest	No Tax Exemption

 

Similarities of Loan Against Property and Home Loans

Some of the features that are common to both home loans and loans against property include:

• Helpful for financing big-ticket expenses such as buying a home
• Long tenure of repayment
• Balance transfer facility

There may be additional features that may be similar in both cases depending on the particular lender or financial institution.

=> Read Also:- Benefits and Disadvantages of Joint Ownership of Property

Conclusion

The difference between a home loan and a loan against property can be quite confusing. After understanding the differences, you can make an informed choice depending on your situation and requirements. If you need funds due to a sudden financial emergency, you can easily get a loan against your property. On the other hand, if you are looking to buy a plot or a new home, you can get a home loan from any financial institution. You can check out the listings on Adani Realty if you are looking for an amazing home. You will find tons of options on which you can easily avail of home loans and get the home of your dreams.