Home loan and loans against property are two different loans but are similar due to the terms used in describing them. Both these loans are drawn against a property. Let us evaluate what are the differences between the two loans.
What is a Home loan?
A home loan is actually a loan that you are taking to buy a ready-to-move-in house or a house under construction. This loan can also be used to buy a plot of land on which you plan to build a house. This is a secured loan offered by banks or financial institutions and therefore the borrower must pay a downpayment. The lender charges a fixed or a floating rate on these loans and the loan must be paid in equated regular EMIs. If the borrower fails to pay the EMIs, the lender can auction the assets and recover the amount.
What is Loan Against Property?
A loan against property is a mortgage loan. In this loan, the borrower can actually pledge the existing property that he has and avail of a loan of the same amount. The property documents must be handed over to the lender in this case.
A loan against property provides a considerable amount of funds to the borrower. The reasons for this type of loan are generally setting up a new business, marriage purpose, or education if pursued by children abroad.
Summary of LAP v/s Home Loan
|Particulars Interest Rate Margin Tenure Tax exemption Purpose Processing fee||LAP 9.5% onwards Up to 60% of property value 15 years No tax exemption For business or personal use Up to 1% of the loan amount plus taxes||Home Loan 8.7% onwards Up to 90% of property value 30 years Tax exemption under section 24 To buy a house, plot etc Up to 1% of the loan amount plus taxes|
Factors Which are Different for LAP and Home Loans
- Interest Rate
The interest rate charged is one of the key differences between LAP and home loans. In the case of loans against property, the interest rates are higher than those levied on home loans. This is because lenders think that defaulting on a loan against property is higher than that of a home loan. One of the reasons might be that the Reserve Bank always tries to make housing affordable for all and thus the interest rates are lower.
A home loan can be used to purchase a plot, a house under construction or a ready-to-move-in house. But, on the other hand, there are no restrictions on how the fund from the loan against property can be used by the borrower. The borrower can use these funds for their children’s marriage, education etc. The loan against property is secured by the asset as collateral.
- Documentation Process
Usually, home loans require around 15 days to be processed, and approved and the funds to get deposited in the account. On the other hand, a loan against property takes longer as the property needs to be valued and the process is a lengthy one.
- Top-up Option
Almost all loans against property have an option to top up after a certain while. This seems to be an attractive option as the funds can be used for multiple concerns but the loan is the same. This provides you with flexibility and ease of use of the loan. Typically, home loans do not have any such facility and may not be so flexible. However, some lenders may offer this option to their borrowers.
- Tax Exemption
Perhaps, one of the most noticeable points between the two is that a tax exemption is available to the home loan borrower but on the other hand, no tax exemption is available to the borrower of a loan against property. Home loans have tax benefits under section 24 of the Income Tax Act and section 80C of the Income Tax Act.
- Loan to value ratio
When you borrow a home loan, you can get up to 90% of finance from a bank or a financial institution. On the other hand, if you borrow a loan against a property, only 60% of the loan is available for finance after evaluating the property.
Interest Rate Comparison for LAP and Home Loans
|Banks||Home Loan||Loan Against Property|
|HDFC Bank||8.80% onwards||9.90% onwards|
|SBI||8.70% onwards||9.95% onwards|
|Axis Bank||8.80% onwards||11.25% onwards|
|ICICI||8.95% onwards||9.50% onwards|
|LIC Housing Finance||8.70% onwards||10.50% onwards|
|Indiabulls Housing Finance||8.80% onwards||11.50% onwards|
Benefits of Home Loan & Loan against Property
|Home Loan||Loan Against Property|
|Gets your dream home||Gets property for Personal & Business use|
|Tax Benefits Included||Low EMIs (Equated Monthly Installments)|
|No Prepayment Charges||Availability of Immediate Funds|
|Balance Transfer Facility||Flexibility in Tenure|
|High Repayment Tenure||Easy Balance Transferring|
|Property Appreciation||Simple Documentation Process|
|No Paying Rent||Quick Approvals|
After considering all the factors given above, we can only conclude that which of the options, loan against property or home loan is better depends on what are your requirements. If you are in need of a good home and you want to settle that aspect, then a home loan is a suitable option for you. But, on the other hand, if you are in need of funds for a different purpose, and you have an asset that is a house, you can pledge the asset and make use of the funds for whatever requirements you have.
In short, both these options have been profitable depending on the situation and the need of the borrower. Thus, the borrower should understand the loan product and then invest their money.