Home Loan vs Loan Against Property – Know the Differences
- Home Loan and Loan Against Property may sound similar and a bit confusing to you because of the terminology used. They are different kinds of loans.
- Both the loan options are taken against property pledged, so knowing the difference between them is essential.
Check the points mentioned below to know about the differences in both the loan options:
What is the purpose of the Loans?
- A home loan can be used to finance a property that has been bought or built or for purchasing a piece of land, on the other hand, Loan Against Property is a loan on an existing property. The property is pledged to the lender, and the borrower draws funds against the property.
- The purpose of a home loan is clearly defined and can only be used for the stated purpose, such as buying or constructing a new property. The end use of Loan Against Property loan is open-ended and can be used for different purposes such as medical emergencies, funds for expanding the business, paying for a wedding, financing the purchase of a property that could be commercial or residential, etc. There is also an option for Home Loan EMI which can turnout to be very helpful.
What is the Rate of Interest offered?
- Since home loans are loans backed by real estate property, the interest rate on a home loan can vary between 6.95% and 11% depending on the lender and the customer’s credit profile. Home loans are considered as priority sector lending and are tied to the Marginal Cost of Funds based Lending Rate (MCLR).
- Loan Against Property popularly known as LAP doesn’t fall under priority sector lending as the end-use is open-ended. As a result, Loan Against Property Interest Rates are higher than for home loans and can range from 07.75% to 15%, depending on the borrowers’ credit profile. However, the interest rate on LAP is lower than on unsecured personal loans.
What is the tenure of both kind of Loans?
- Home loans and LAP are long-term loans.
- Nowadays, lenders offer up to 30 years of tenure for home loans.
- LAP doesn’t enjoy long tenures like home loans. The most extended term for Loan Against Property is maximum up to 15 years depending on factors such as borrower’s credit profile, age and condition of the property mortgaged or the loan amount, etc.
What is the Loan to Value Ratio for both kind of loans?
- All loans require certain margin payments from the borrower signifying their commitment. The margins also protect lenders from a decline in the market value of the real estate property. The same applies to home loans and loan against property.
- RBI issues guidelines for lenders on the minimum percentage of margin money must be collected from each borrower for the home loan.
- The maximum percentage allowed for home loans is 90%, which means that the borrowers must pledge the remaining 10%. This margin may rise in case the borrower has a low credit score.
- Similarly, the National Housing Bank has set margin requirements for housing finance companies, which are also based almost on the RBI’s margin requirements.
- For Loan Against Property, the margin requirements are higher, as it not considered a priority lending sector. The margin requirement can, therefore be between 24% and 40% of the property value.
For Instance, if you want a loan against a property valued at ₹ 80 lakhs and the lender sets the margin at 30%. The maximum amount that can be offered will be ₹ 56 lakhs.
What is the documentation process and Ease of Approval?
- Both home loan and LAP is based on the real estate property, so, the documentation requirements are high.
- In home loan case, if the purchases are from known developers or approved projects, they require less documentation and have a faster approval process.
- For a loan against property, the documents required are very high, and it changes depending on the mortgaged property. If the property is held jointly, consent from both owners is required, and the lender must carefully review the title of your property and impediments. Disputes can also arise if you inherit a property, especially if it belongs to two people, such as a family member. So, the approval process for a loan against property can take longer than for home loans, as there can be many legal issues.
What Income Tax Benefits you can avail?
- As we all know, the benefit of income tax on home loans is a huge advantage, especially for low-income families. Income tax advantages are available under Section 80 C of Income Tax Act (till ₹ 1.5 lakh) for payment of interest up to ₹ 2 lakh under Section 24 of the Income Tax Act.
- If your spouse or other qualified person takes out a home loan as co-owners, you can benefit from this tax benefit as long as they pay back the loan. Depending on how your loan is used, you may also be entitled to tax relief on loan against property.
- If you use the loan for business purposes, then the interest paid and expenses such as processing or document verification fee can be shown as business expenditure under Section 37 (1) of the IT Act.
- If the loan amount from the Loan Against Property is used for expenses such as marriage or medical emergencies, then no income tax benefits will be available.
- You can also claim interest deductions from your loans if the loans for your property are used to buy real estate, but you would need to prove that you have used your income from this loan to finance the purchase of this new property. However, in this case, you lose out the principal repayment advantage, as the repayments are not considered equivalent to the principal amount being repaid on a home loan.
Conclusion: Loan Against Property is a feasible option if you require a large ticket loan at low-interest rates than a personal loan. Prospective borrowers must keep in mind to make regular repayments of the loan; otherwise, they might end up losing their property.