HOME LOAN VS LOAN AGAINST PROPERTY

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Simranmeet Singh
Simranmeet

Dec 21, 2020

HOME LOAN VS LOAN AGAINST PROPERTY

While the distinction between a house loan and a property loan is evident by their names, many people are still confused about how these two function.

As Individuals require loans for various purposes and There are so many products in the market Let’s start by defining each type of loan to get the basic difference between them.

DEFINITION

 

Home Loan

 

home loans: What are the types of home loans available? - Times of India

A home loan or a home loan is a facility from which funds can be obtained to purchase a house by paying a small share for the down payment.

This loan is made available based on the present value of the property and takes into account many factors, including the applicant’s age and salary, credit score and background, the position of real estate, professional stability, and the category of employer.

Loan Against Property

How To Avail A Loan Against Property On Low Interest Rates | Indiablooms -  First Portal on Digital News Management

A loan against property is a mortgage loan. In doing so, the creditor will pledge his current self- owned property for an amount of money equal to a certain percentage of the market value of the property he owns. He shall hand over the property documents to the lender before he repays the loan which will be repaid in the EMIs consisting of the principal amount of the loan taken and the interest rate. If the borrower defaults on repaying the loan, the lender can auction off the pledged property to repay the investment.

Now let’s look at the other factors of difference between the two.

 

1.Purpose of Loan

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You can get a housing loan from the lender for the following purposes: o  Home purchase

  • Land purchase
  • Plot purchase
  • Construction
  • Improvement
  • Conversion
  • Extension
On the other hand, a loan against property is generally taken, to raise additional funds for the business. The loan against property may be obtained in two forms. It can be a pure loan, under which, a lump sum is paid to the borrower, against the security of immovable property. It can also be taken for other personal expenses like children’s education, Medicines, Weddings, and so on.

 

2.Interest Rates

Interest Rate Definition

 

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.

Another reason is that the Government and the Reserve Bank of India (RBI) are focused on making housing affordable for everyone which minimizes the margin requirement of a home loan. Typically home loans begin at @ 6.80% onwards whereas you’ll see interest rates for the loan against property start from 8% and above.

 

3.Loan to Value

LTV - What is Loan-To-Value Ratio? | Zillow

To safeguard themselves against a decline in the market value of the asset, lenders do not lend the full value of the security/underlying asset. This difference that the lender retains while lending. The amount of loan availed against the property is known as the Loan Value ratio.

To this effect, home loans grant a higher percentage compared to the value of the property – up to 90%. But loans against property generally offer up to 60-70% of the property value. Banks usually visit the property site before sanctioning the home loan. Property valuation is also performed in case of a loan against property.

 

4.Loan tenure

Compare Best Home Loan Tenure: 15 Vs 30 Years

The maximum repayment period permitted for a housing loan shall be 30 years.
Borrowers can select a tenure depending on their willingness to repay. Whereas the overall term of the loan against the property is 15 years. You may choose the length of the loan from 1 year to 15 years or less. 

5.Tax Exemption

How to apply for Tax Exempt status Under Sec 12A of The Income Tax Act - Sec 12A | Income Tax Act - Good Karma for NGOs

Under Section 80C of the Income Tax Act, a home loan borrower may be given a tax exemption of up to Rs. 1.5 lakhs on the principal repayment sum. The borrowers may also be given an additional tax exemption up to Rs. 2 lakhs on the amount of interest referred to in Section 24.

However, borrowers are not given a tax deduction on their mortgage loan. So if you think that just like a home loan where there is an additional

benefit for borrowers to get a tax exemption from U/S 80C & 24(b), there is no such advantage with a loan taken against the property.

 

6.Documentation Process

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In the case of a home loan, the duration of the sanctioning is approximately 15 days with a clear paperwork procedure. However, in the case of a loan against property, the time taken is comparatively much longer as the banking institutions and the NBFCs (Nonbanking Financial Companies) conduct detailed checks on the particulars of the property and the personal information of the borrower or the applicant.

Thus, given all the details related to the comparison between home loan and property loan, the borrower can easily distinguish and prioritize his/her requirements and check and compare the different loan options provided by several banks and NBFCs.