When it comes to home loans, many financial terms confuse applicants. Mostly, borrowers get confused between a 'home loan' and a 'loan against property, and their features and benefits become more confusing for them.
Home loans are mainly taken for the purchase of a house, plot, under-construction property, etc. A Loan Against Property is a secured loan, which helps borrowers to meet their personal and business needs by pledging their real estate asset(s). A Loan against property can be used for various purposes, such as the expansion of business, marriage in the family, funds for medical treatment, holidays, higher studies for children, etc.
To meet any financial goal or emergency, individuals prefer to apply for loans. Banks and other financial institutions offer different loan products for different life events. You need to know that there is a huge difference between a home loan and a loan against property. Let's understand the difference.
What is Loan Against Property?
A Loan Against Property is a type of loan that allows borrowers to use the loan amount to meet financial requirements for any life event, to fund a business, for any personal need, or for a medical emergency. The sanctioned amount depends on the value of the property. In this, a borrower can pledge their existing, self-owned property for an amount that is equal to a specified percentage of the market value of the property owned by them. This is called Loan to Value (LTV).
As the name suggests, the borrower must mortgage the property against the loan amount. The borrower must hand over the property documents to the lender till the loan is repaid, if the borrower defaults on the loan repayment, the lender can sell the mortgaged property to recover his investment.
What is Home Loan?
A home loan is a loan option, usually availed by potential homebuyers, who wish to buy a new home, plot, or fund an under-construction property. It is a loan given by banks or housing finance companies and hence the buyer will have to make a down payment. The lender charges a fixed or floating interest rate on the loan and hence the buyer must repay the loan in monthly EMIs.
The lender owns the property till the borrower pays the EMI after which the ownership is formally transferred to the borrower. If the borrower defaults on the EMI, the lender can auction it to recover the loss.
Home Loan Vs Loan Against Property
Interest Rate: A home loan is offered at comparatively lower interest rates as compared to a loan against property. Poonawalla Fincorp offers home loans starting from 9.55% p.a. while it offers loans against property starting at 13% p.a. The rates in both these cases differ from lender to lender. One of the major differentiators is the rate of interest being charged to the borrower. Generally, the interest rate of a loan against property is higher than the interest rate charged on the home loan. This is often because banks and lending institutions feel that the chances of people defaulting on loans against property are high. Additionally, the government and the Reserve Bank of India (RBI) always strive to ensure that housing is affordable for all, therefore, efforts are being made to bring down the cost of taking home loans.
Usage: While home loans have limited uses, they can usually be availed only for buying a house, plot, or property under construction, whereas a loan against property is a multi-purpose loan. Anything from expanding your business to funding your child's education can be done in case of a loan against property. A loan against property is secured by using your land property as collateral.
Loan to Percentage Value: Another important difference is that the loan against property offers you around 60-70% of the value of the property, whereas for a home loan this figure can go up to 90%.
Loan-to-Value (LTV): The loan-to-value is the maximum limit of loan granted by the lender as compared to the market value of the property. Banks usually visit the property site before sanctioning a home loan. Valuation of the property is also done in case of a loan against the property.
Prepayment charges: As per RBI guidelines, lenders have no right to charge any fee for the prepayment of any loan based on floating rates. However, fixed interest rate loans have some prepayment fees.
Nature of Property: A home loan can be taken for residential purposes only. Whether it is a ready-to-move property or the purchase or expansion or renovation of land, the loan is given only for the property used or to be used for residential purposes.
Whereas in the case of a loan against property, the loan can be taken only against the commercial, residential, or industrial property. The property documents are kept with the lender as collateral which is returned only after successful completion of repayment.
Purpose: Another major difference between a home loan and a loan against property is the purpose for which the loan is taken. Home loans are usually taken to buy a house, plot, or under-construction property among other things. On the other hand, Loan Against Property allows you to mortgage your existing assets in exchange for money needed for various personal reasons like an expansion of business, education of your children or marriage, medical expenses, etc.
Tenure: A home loan can be taken for a maximum period of 30 years, however, a loan against property is provided for up to a maximum of 15 years.
Home Loan Top-up: Top-up on a home loan is better than applying for a new personal loan or gold loan. You can use the amount for any legitimate purpose by adding a minimum amount to the existing EMI. To get the top-up, you must have paid the regular monthly installments of your home loan for at least 1 year.
Documentation process: In the case of a home loan, the period required for its approval is a few days with a simple documentation process. However, in the case of Loan Against Property, relatively more time is required as banking institutions and NBFCs (Non-Banking Financial Companies) conduct thorough scrutiny of the property details and personal information of the borrower or applicant.
Tax exemption: Nil, in case of loan against property, but tax benefits under section 24 for interest on home loan and 80C for the principal amount.
The decision to choose between a home loan and a loan against property depends on your requirement. As you can see, home loans and loans against property are not completely the same. They serve different purposes.
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