Home Loan vs. Loan Against Property: Understanding the Key Differences and Choosing What’s Best for You

When it comes to financing major expenditures like buying a house or funding a child’s education, many individuals find themselves comparing two popular loan options: Home Loan and Loan Against Property (LAP). While both these financial products are secured loans, they serve different purposes and have distinct features. In this blog, we will delve into the nuances of Home Loan and Loan Against Property, helping you make an informed decision based on your financial needs and circumstances.

Table of Contents

Home Loan
Key Features of a Home Loan
Loans Against Property
Key Features of Loan Against Property
Difference between Home Loan and Loan Against Property
Interest Rate of Home Loan and LAP for Major Banks/NBFCs
Making the Right Choice

Understanding Home Loan

A Home Loan is specifically designed for purchasing a new home, constructing a house, or renovating an existing property. It is a secured loan where the property being purchased or constructed serves as collateral. Home Loans are popular because they offer a long repayment tenure, competitive interest rates, and tax benefits under various sections of the Income Tax Act.

Key Features of a Home Loan

Purpose: Exclusively for purchasing, constructing, or renovating a residential property.
Loan Tenure: Typically ranges from 15 to 30 years.
Interest Rates: Generally lower compared to personal loans or LAP, considering the lower risk involved.
Tax Benefits: Offers tax deductions on both principal and interest repayments under specific income tax sections.
Loan-to-Value Ratio (LTV): Lenders finance up to 80%-90% of the property’s value.

Suggested read: Top Banks for Home Loans in India

Understanding LAP

LAP’s full form in banking is Loan Against Property. It involves borrowing a significant sum of money by mortgaging an owned property. The loan amount depends on the current market value of the property. LAP can be used for various purposes like financing a business, funding education, medical expenses, or any other personal needs. It does not restrict the end-use of the funds.

Key Features of Loan Against Property

Purpose: Versatile, can be used for any legal purpose including business expansion, education, medical emergencies, etc.
Loan Tenure: Ranges up to 15-20 years, typically shorter than home loans.
Interest Rates: Slightly higher than home loans but lower than personal loans.
Tax Benefits: No loan against property tax benefits unless the loan is used for the construction or purchase of a property.
LTV Ratio: Generally, lenders offer around 50%-75% of the property’s market value.

Suggested read: Business Loan vs Loan Against Property

Difference between Home Loan and Loan Against Property

Feature	Home Loan	Loan Against Property (Mortgage Loan)
Purpose	To purchase a house, plot, or under-construction property	For business or personal use
Margin	Up to 90% of property value	Up to 60% of property value
Tenure	Up to 30 years	Up to 15 years
Tax Exemption	Available under Section 24 (interest) & 80C (principal)	None
Interest Rate	Starts from 8.50%	Starts from 9.50%
Processing Fee	Up to 1% of loan amount + applicable taxes	Up to 1% of loan amount + applicable taxes

Purpose and Flexibility: Home Loans are restrictive, meant only for housing-related expenses. LAP offers flexibility in terms of usage, allowing borrowers to fund various personal or business needs.
Interest Rates: Home Loans typically come with lower interest rates owing to their nature and purpose, making them more cost-effective in the long run. LAP, while cheaper than personal loans, usually carries a higher interest rate compared to home loans.
Loan Tenure and EMI: Home Loans usually have a longer tenure, resulting in lower EMI payments, making them suitable for long-term financial planning. LAPs have shorter tenures, which can lead to higher EMI payments.
Tax Benefits: One of the significant advantages of a Home Loan is the tax benefit on both the principal and interest components. LAP does not usually offer such benefits unless the borrowed money is used for the construction or purchase of a property.
Loan Amount and LTV Ratio: The LTV ratio in Home Loans is generally higher, allowing borrowers to finance a major portion of the property’s value. In LAP, the loan amount is based on the current market value of the mortgaged property and is typically lower in comparison.
Processing Time and Documentation: LAP might have a quicker processing time since it involves mortgaging an already-owned property. The documentation for Home Loans can be more rigorous, considering it often involves the purchase of a new property.
Risk Factor: The risk in a Home Loan is often lower as it is linked to the purpose of housing. In LAP, since the end-use is not restricted, it poses a relatively higher risk for both the lender and the borrower.

Interest Rate of Home Loan and LAP for Major Banks/NBFCs

Bank/NBFC	Home Loan Interest Rate	Loan Against Property Interest Rate
SBI	8.50% onwards	9.95% onwards
HDFC	8.55% onwards	9.90% onwards
AXIS	9% onwards	11.25% onwards
PNB Housing	8.75% onwards	10% onwards
LIC Housing Finance	8.50% onwards	10.50% onwards

Making the Right Choice

Choosing between a Home Loan and a Loan Against Property depends largely on the purpose of the loan and your financial situation. If you are looking to buy, construct, or renovate a home and can benefit from the tax deductions, a Home Loan is likely the better choice. On the other hand, if you need funds for diverse personal or business needs and have an existing property to mortgage, LAP could be more suitable.
Both Home Loans and Loans Against Property have their own set of benefits and limitations. It’s crucial to assess your financial goals, repayment capacity, and the purpose of the loan before making a decision. Understanding the nuances of each option can help you choose the one that aligns best with your financial strategy and long-term objectives. As with any financial decision, it.

FAQs About Home Loan vs. Loan Against Property

What are the eligibility criteria for a home loan or a loan against property?

Eligibility criteria typically include a stable income source, a good credit score, age (usually between 21 and 65 years), and the property’s legal and valuation status. For LAP, the property’s market value and condition are also assessed.

What are the interest rates for a home loan or a loan against property?

Home loan interest rates generally range from about 8.5% to 10.5%, while loan against property interest rates are slightly higher, usually between 9.5% to 12%, varying by lender and market conditions.

What is the difference between a home loan and a loan against property?

A home loan is specifically for buying, constructing, or renovating a residential property, with the property itself as collateral. LAP is a loan secured against any owned property for various personal or business purposes, not restricted to housing.

What are the tax benefits available for a home loan or a loan against property?

Home loans offer tax deductions on both the principal and interest under various sections (like Section 80C, and Section 24) of the Income Tax Act in India. LAP generally doesn’t offer tax benefits unless used for building or purchasing a property.

Can I loan against property without income proof?

It can be challenging to get a loan against property without income proof as lenders assess repayment capacity based on income. However, some lenders may consider other factors like property value, credit history, or alternative income sources.

Can we convert a mortgage loan to a home loan?

Generally, it’s not possible to directly convert a mortgage loan (LAP) into a home loan because they serve different purposes and have different terms. However, one can use a LAP to buy or construct a property and then refinance it with a home loan, subject to lender policies and eligibility.

Published on 22nd January 2024