Thu, 24 Nov 2022 05:46 PM IST
Home loan and loan against property are two terms often used interchangeably. This is because both are credit options that require collateral. However, they are different options.
Therefore, it is essential to learn about their differences before applying for one. This article demonstrates the characteristic differences between loans against property and home loans and discusses the benefits of the two. To gain some insight, give it a read.
- Loan Against Property and Home Loan
A loan against the property or LAP is a type of secured loan that can be availed by salaried employees as well as business owners. In order to get this credit, you have to pledge your property as a mortgage. Therefore, it can be either a residential or business property. The credit you receive will be equivalent to the value of the pledged collateral.
Home loans are credits that you can advance to purchase a residential property. Here, the property you are willing to buy stays as a mortgage with the lender until your repayment tenure is over. Furthermore, these are large sums of finances that can cover up to 70% to 90% of your purchasing cost after you make the down payment.
- How is a Loan Against Property Different from Home Loan
The above definitions can give you a basic overview of the two loans and how they differ. However, there are differences between home loans and loans against property, both characteristically and functionally.
Here are some of the following:
Purpose: Home loans are self-defined. They are credits you can avail to buy a residential property. They can include a house, an apartment under construction, or a plot. The purpose of property against loan depends on you. You can secure a substantial amount either for your personal expenses or to start up a new business or extend it.
Security/Collateral: In the case of home loans, you have to offer the intended purchase property as collateral. This means the house you are willing to buy will remain as a mortgage till you fulfil the repayment tenure to completion. However, for LAP, the collateral consists of a property you already own and not the one you plan to buy.
Interest Rates: The interest rates for home loans are much lower comparedto loan against property interest rates. This is due to two reasons:
1. The Government and RBI attempt to ensure the affordability of housing is maintained. Therefore, the interest rates offered by lenders are competitive and economical.
2. On the other hand, when someone pledges their property to secure finance, it shows that they are in dire need of money. Hence, lenders find it riskier and believe they are prone to defaulting and increasing interest rates.
Tenure: Similar to interest rates, the repayment tenure for home loans is longer than that of a loan against property. For home loans, you can extend your tenure up to 30 years, while the maximum tenure extension for the latter is usually up to 15 years.
Tax Exemption: Tax exemption is an important factor that differentiates LAPs from home loans. Under Section 24 and Section 80c of the Income Tax Act, availing home loans can offer you tax benefits. This means the total amount of instalments you pay each year gets deducted from your taxable income till the end of tenure. Conversely, a loan against property does not include any tax benefit.
Loan-to-Value Ratio: For home loans, you can receive a credit that sums up to 90% of the total value of the purchasing property. However, in the case of mortgage loans, first, your property will be evaluated based on the current market. Next, you can secure a maximum of 60% of the value of the pledged collateral.
- Benefits of Loan Against Property
Here are the top benefits of a loan against property:
Multiple purposes: The amount you secure from LAPs can be used for numerous expenses like treatment, business extensions, personal bills, etc.
Longer repayment tenure: Loan Against Property offers longer repayment tenure than personal or unsecured loans. You can stretch up to 15 years of EMI repayment, reducing your monthly debt burden.
Lower instalments: Since they allow longer tenure, mortgage loans can significantly reduce the burden of your monthly EMIs. Therefore, you can pay smaller amounts for extended periods and manage your finances accordingly.
Easy to secure: LAPs are easier to avail since they are secured by collaterals. If you are in a financial emergency, you can pledge your property asset to opt for credit hassle-free.
- Benefits of Home Loan
Some of the benefits of a home loan are:
Tax benefits: With the tax exemption regulation for home loans, you can save a significant amount of your annual taxable income.
Balance transfer facility: You can transfer the loan amount to a different lender if they offer you a better interest rate.
Lower interest rates: Unsecured loans have higher interest rates as you do not have to pledge your assets to secure them. However, with home loans, you can avail a substantial amount at competitive rates and build the house of your dreams.
Due Diligence: Since the credit amount for home loans is entirely used for the house's construction or purchasing cost, lenders conduct a thorough investigation to determine their legal position. Therefore, it protects you from fraud or any legal dispute with that property.
- Interest Rates Offered by Lenders for Loans Against Property and Home Loan
If you are looking for a home loan or LAP, here are a few reliable lenders offering competitive interest rates:
Disclaimer: The data mentioned above is subjected to changes, and one must verify before taking a call.
This article elaborates on how a loan against property differs from a home loan, including its benefits and features. In order to secure any one of the two, you have to pledge an asset owned by you. Each comes with its own advantages and offers. Therefore, it would be wise to learn how they are different and which suits your situation the best.
(Note: This article is written by the Brand Desk)