Home loans and loans against property are terms that are used interchangeably in the financial market. But are they really the same? The simple response is ‘NO.’ The following article details the key differences between both loan products.
What is a home loan?
A home loan is a financial product that assists you with the purchase of under-construction property, ready-to-move home, or empty plot on which you intend to construct your dream home. Home loans are a type of secured financing in which the property you are purchasing is pledged to the lender until all outstanding debts are paid. If you default on your loans, the lender will auction off your home to recoup the unpaid balance. The surplus amount from an auction will be credited to your account.
However, remember that the lender only has conditional ownership of your home. You can utilise the property for your living or put it out on rent without facing any objection from the lender.
What are loans against properties?
One of the major similarities between a home loan and a loan against property is that both are secured loans. Apart from this similarity, both of these loans are completely distinct from one another. A loan against property is a mortgage loan in which the lender approves the loan after you have kept your house, business building, factory, or other property as collateral with them.
The lender assesses your property’s valuation based on the circle rate, its condition, and locality. It then determines the loan value based on a proportion of the property’s current valuation. Similarly to home loans, the lender retains conditional ownership of the mortgaged property. It implies you are free to use the mortgaged asset as you see fit.
Home loan vs loan against properties: Know the difference
- Interest Rate:
Since both are secured loans and the mortgaged/pledged assets in both circumstances have a higher value that appreciates with time, the interest rates for both are lower. Some lenders offer cheaper house loans, while others offer mortgage loans at lower rates.
However, do you know the type of property against which you are taking a mortgage loan plays a major role in determining the interest rate? If not, keep reading.
If you own commercial space and secure your loan against it, the lender will disburse the loan at a cheaper interest rate. The reason behind this is commercial offices are located in upscale areas. And if you default, such a type of property is easily auctioned off to recoup the debt. On the other hand, if you own a home on the outskirts of town, the lender is likely to charge a higher interest rate.
- Purpose
Another major difference between these two loan products is the purpose. Home loans come with various restrictions. You can utilise the funds from a home loan only for the purchase of a home, land, and under-construction property. Though, this is not the case with a mortgage loan.
You can use the funds for whatever purpose you want. For example, the loan amount could be used to pay for your child’s further education, treat a severe illness, fund your start-up, or cover the entire cost of your wedding.
People usually opt for this loan to fund their start-ups. The reason is financial institutions do not lend to young enterprises because of their lack of business expertise and the higher risk associated with their profile.
- Loan tenure
This is where a home loan outperforms a loan secured by real estate. Home loans are typically available with a maximum payback period of 30 years. On the other hand, Mortgage loans have a maximum repayment period of 15 years. But there is a catch. Did you realise that the longer your repayment period, the more you will have to pay in interest? Here is an example if you are not familiar with this concept.
| Parameters | 10-year repayment period | 20-year repayment period | 30-year repayment period |
| Loan Amount | Rs 60,00,000 | Rs 60,00,000 | Rs 60,00,000 |
| Interest Rate | 8.5% | 8.5% | 8.5% |
| EMI | Rs 74,391 | Rs 52,069 | Rs 46,135 |
| Interest Payable | Rs 29,26,970 | Rs 64,96,655 | Rs 1,06,08,531 |
| Total Payable | Rs 89,26,970 | Rs 1,24,96,655 | Rs 1,66,08,531 |
The table shows that choosing a longer tenure results in a higher interest payment amount than the actual borrowing. If you choose a 30-year term, the interest charged on the home loan is three times the amount borrowed.
- LTV Ratio
The loan against the property provides financing for up to 75% of the property’s value. On the other hand, home loans have an LTV range from 40 to 80%. But Mortgage loans outperform home loans in terms of the loan amount. The former is available up to a maximum of Rs 15 crores provided that you have a complete loan against property documents on hand, whilst most lenders offer home loans up to Rs 5 crores.
To conclude
A loan against property is far better than home loans in various aspects. It offers a higher loan amount and an affordable interest rate. Moreover, you can use the funds for any purpose, including a home purchase.
