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Home Loan & Loan Against Property - Are They Same?
Home loan and loan against property or mortgage loan are not the same as some people may tend to think because of the similar sounding terminology. The two are different as chalk and cheese. They differ not only in what they mean, but also with respect to the tax implications, the quantum of the loan, the term of the loan and other such aspects. What is a home loan and what is a loan against property? Which one has a lower interest rate? Which one of the two has higher tax benefits? Which is a better home loan or loan against property? Read on to understand how the two compare.
What Is a Home Loan?
A home loan is a loan taken to buy a house - be it an apartment or a villa. You can also get a home loan to buy a piece of land, or a plot. In case you already have a plot, you can take a home loan to construct a house on the plot. In case you already have a house, you can take a home loan for extending the house - i.e., adding more rooms, or adding one or more floors. You can also take a home loan for renovating or improving an existing house. In short, a home loan is a loan taken for residential property only, and not for commercial property.
The loan amount depends on the property valuation, and factors such as the age, occupation, salary, and credit score of the borrower. In a home loan, the borrower does not yet own the property for which the loan is taken.
What Is Loan Against Property?
A loan against property, also known as mortgage loan, is a loan taken against a property which you already own. If you want to raise funds for some purpose, such as a marriage at home, or a child’s education, or to start a business or other such reasons, then you may take a loan against property. The said property against which you intend to take a loan can be either residential or even a commercial property. That is to say, it can be a plot, a piece of land, an apartment, a villa, or a commercial property such as a shop or an office space.
As in case of home loan, even for loan against property, the loan amount depends on the property valuation, and aspects like age, occupation, income, and credit score of the borrower would also be considered to determine the loan eligibility.
Which is a Better Home Loan Or Loan Against Property?
Is it better to go for a straightforward home loan or raise finance against an existing property? That, as mentioned before, depends on what you want. If you are looking to buy a house, and you need the finances to make it happen, then you need to go for a home loan. Whereas, if you already have a residential or commercial property, and you need money to fulfill some requirement, then you would go for a loan against the property.
Home Loan Vs Mortgage Loan - How They Compare?
Now that the purpose of home loan vs mortgage loan, or loan against property is understood, let us find out how the two stand in comparison. In general, the quantum of loan is lower in loan against property than in home loan, and also the interest rates are higher in loan against property compared to home loan. See table below to find out how home loan vs mortgage loan are similar or how they would differ in terms of the tax exemption, tenure, interest rate and other financial aspects.
|
Home Loan |
Loan Against Property |
|
|
Meaning |
A loan taken to buy a property, not already owned by the borrower. |
A loan taken on an existing property, already owned by the borrower. |
|
Quantum of Loan |
Up to 90% of the property value. |
Up to 65% of the property value. |
|
Loan Type |
It can be fixed interest or floating interest rate. |
It can be fixed interest or floating interest rate. |
|
Rate of Interest |
Generally lower compared to mortgage loan - about 8.7% to 14% |
Generally higher compared to home loan - about 9.5% to 16% |
|
Loan Tenure |
Term can be long - up to 30 years. |
Shorter term - up to 15 years. |
|
Processing Time |
Processing is faster, and can take up to 15 days, as property is already approved by banks, and only individual evaluation is needed. |
Processing can take longer, as banks would need to verify all the documents, inspect the property, apart from individual eligibility evaluation. |
|
Processing Fee |
May be applicable at 1% of loan amount, or exempt if there are any promotional offers. |
May be applicable at 1% of loan amount, or exempt if there are any promotional offers. |
|
Prepayment Charges |
Can be relaxed as per RBI guidelines. |
Prepayment charges are applicable. |
|
Tax Exemption |
Tax exemptions applicable on both the interest and the principal amount, under Section 24 and Section 80C. |
Tax exemption available only on the interest component |
|
Purpose |
Available for buying residential property only. |
Purpose is not restricted - can be for medical, education, personal, travel, business, etc. (But not for gambling, buying shares and such speculative or other suspicious purposes). |
Benefits of Home Loan Vs Loan Against Property
So it is not a question of which is better home loan or loan against property.
You can use a home loan to buy your dream house, and additionally get tax benefits. SInce the repayment tenure is quite long, the EMI will not be a large burden as time passes, because your income would increase drastically over the years, but the EMI would remain the same. You can comfortably repay the loan, while the property value appreciates.
A loan against property can help you meet your requirements at fairly lower interest rates compared to personal loans or other loans taken from the market. You get 15 years to repay the loan, which is quite comfortable and long term. Additionally, you can also avail tax benefits on the interest component.
