Difference between home loan and loan against property

A home loan is a high-value loan. It is also one that requires quite an elaborate process in which the buyer has to familiarise himself with several jargons and financial terms. As such, it can leave the home buyer a bit confused about all the terminologies associated with the loan. Most buyers especially use the terms home loan and loan against property interchangeably, when the fact is that they are two different things altogether. Let’s find out what the two terms actually mean and the major differences between these two types of similar sounding loans.

What is a home loan?

A home loan is essentially a loan you take to purchase a ready-to-move-in house, a property under construction or a plot of land on which you intend to build a house. This is a secured loan offered by banks or housing finance companies and the buyer must pay a down-payment. The lender charges a fixed or floating interest rate on the loan and the home buyer must repay the loan in monthly EMIs. The lender continues to remain the owner of the property until the borrower pays off the EMIs after which the ownership is formally transferred to the borrower. If the borrower defaults on EMIs, the lender can auction it off to recover losses.

What is a loan against property?

The major confusion between a home loan and  loan against property arises from the fact that both loans are secured loans. However, that is the only similarity between the two. A loan against property is essentially a mortgage loan. In this, a borrower can pledge his existing, self-owned property for a sum of money that equals a certain percentage of the market value of the property he owns. He must handover the property documents to the lender until the time he repays the loan and the loan, like the home loan, can be repaid in EMIs consisting of the principal loan amount taken and the interest rate. If the borrower defaults on repaying the loan, the lender can auction off the pledged property to recover his investment.

Home loan vs loan against property 

Interest rate:

The interest rate levied on a loan against property is typically a slight bit higher than a home loan. The reason for this is that the chances of defaulting on mortgage loans are higher than regular home loans. Moreover, home loans come with lower interest rates due to the Government of India’s ‘affordable housing for all’ initiative. One can get a home loan for an interest rate starting at 8.70% whereas the interest rate for mortgage loans begins at 9.50% and above.

Purpose:

Another major difference between home loan and loan against property is the purpose for which the loan is availed. Home loans are typically availed for the purpose of purchasing a home, plot, or a property under construction among other things. On the other hand, a loan against property allows you to mortgage your existing property in exchange for funds required for various personal reasons such as business expansion, funding your children’s education or wedding, medical expenses and so on.

Loan to value ratio:

When you take out a home loan, you can get finance of up to 90% of the value of the property. On the other hand, the maximum loan amount sanctioned in case of a mortgage loan is 60% of the property value, after the property is evaluated by the lender.

Tenure of the loan:

This is another major difference between home loan and loan against property. Home loans are provided for tenures of 20 to 30 years, whereas a loan against property comes with a maximum tenure of 15 years.

Tax exemption:

While you cannot avail any tax exemption on loan against property, there are several provisions for tax exemption on home loans as per Section 80C and under Section 24 of the Income Tax Act.

As you can see, home loans and loans against property are not entirely the same. A loan against property is basically a type of home loan but it comes with its own set of rules and regulations. That said, it is quite easy to get either types of loan.