Difference between home loan and loan against property

Easy accessibility of loans and a wide range of home loan products have made life easier for the borrower. But sometimes the variety of options can make it a bit tough to decide which loan to go for when you are planning to apply for a loan. A case in point is when deciding between a loan against property and a home loan. Most people confuse these two different types of loans and use their names interchangeably. Apart from the fact that both of these loans are secured in nature. Both, a home loan and a loan against property are different when it comes to their usage, interest rates, tenor, LTV ratio, and processing fees.

What is a Home Loan?

A home loan is the amount of money borrowed by an individual from a lender such as banks or NBFCs to purchase a house. The loan amount and interest are repaid to the lender in form of EMIs over a period depending upon the tenure of the loan. The type of property for which a loan is taken could be a ready-to-move-in house or a vacant plot of land or an under-construction property. A home loan can be taken for both, personal and commercial property. It is a secured loan because the lender takes the property as security for a home loan. In case of default in repayment of the home loan, the lender can take possession of the property and sell it off to cover losses.

What is a Loan Against Property?

A loan against property is a secured loan taken against your residential or commercial property. A loan against property is preferred by many borrowers because it provides a high loan amount at low interest rates as compared to personal loans. If you have a property in your name and can provide documentation that establishes your ownership then you are eligible for a loan against the property. It can aid in fulfilling a variety of your financial requirements and has become a go-to option in recent times for most people.

Home Loan vs Loan Against Property

Listed below are some key factors which highlight the difference between a home loan and a loan against property.

• Usage

  One of the major differences between a home loan and a loan against property is the usage of a loan. A home loan is used to purchase a commercial or residential property such as a ready-to-move-in apartment, property under construction, or a plot of land on which the borrower intends to build his/her home. A loan against property is more versatile in nature and can be used for buying a property or meeting fund requirements arising because of personal reasons such as growing your business, a medical emergency in the family, or funding your child’s education, etc.

• Interest rate

  A home loan interest rate is slightly lesser as compared to the interest rate offered for the loan against property. One reason could be the effect of the government of India’s Pradhan Mantri Awas Yojana initiative which aims to make housing affordable for all. Another reason for this difference in interest rate is that the chances of defaulting on a mortgage loan are higher in comparison to a home loan.

• LTV ratio

  LTV ratio or the Loan-to-value ratio is a risk assessment methodology a lender employs to understand the lending risk. Higher the loan assessment LTV ratio, the higher the risk associated with that loan which can lead to higher interest rates levied by the lender. For a home loan, the loan amount sanctioned can go as high as 90% of the property’s market value. In the case of a loan against property, after the lender’s evaluation, the maximum amount sanctioned can go as high as 60% of the property’s market value.

• Tax Benefits

  Unless used to buy another property there are no tax exemptions that can be availed on a loan against property. On the other hand, various tax exemptions can be availed on a home loan under Section 80C and Section24.

Bottom Line

Even though a home loan and loan against property may sound similar to new borrowers, they differ in the purpose they serve. A home loan is what you need if you are thinking of buying a property be it commercial or personal. But if you are planning to take a loan for fund requirements that go beyond purchasing a house, a loan against property would be a good option.