Being different forms of secured credit borrowing methods, home loans and loans against property can seem interchangeable terms. However, there are some pivotal fundamental differences between these two financial tools. So, applicants must know about the variance between property loans vs. home loans.
What Is Home Loan and Loan Against Property?
A borrower can apply to a financial institution for formal credit access to purchase a new house. Such credit is referred to as a home loan. Notably, an applicant can use this sanctioned amount solely to construct a new house or buy a ready-to-move-in property.
Alternatively, for a loan against property, a borrower can mortgage a loan-free property that he or she already owns to avail a certain credit amount from lenders. In this scenario, an absence of an end-use restriction allows the borrower to use the sanctioned credit amount as per requirement – personal or commercial.
How Does the Interest Rate Differ for Housing Loans and LAP?
The interest rate a lender charges borrowers also has a significant margin of difference in home and property loans. The push by the RBI for affordable housing has resulted in the home loan interest rate being less than that of a LAP.
To elaborate, leading financial institutions in India offer around 8.30% interest rates for salaried and professional borrowers applying for a home loan. On the other hand, the interest rate for a loan against property currently stands around 9.50% for this same group of individuals.
How Do Loan-To-Value [LTV] Ratios Differ for Home Loans and Loans Against Property?
A loan-to-value ratio refers to the percentage of the appraised collateral property’s value that lenders can provide a borrower as credit. Depending on the risk factors involved for financiers, the LTV ratio varies significantly for these two types of secured loans.
When a borrower is applying for a home loan, the LTV ratio of the sanctioned credit amount can be as high as 90%. However, when it comes to loan against property, the market value of a property being closer to the amount owed to lenders can label the applicant as a high-risk borrower. Therefore, the LTV ratio for a LAP is limited to 60%-75%. However, keeping the financial goals of borrowers in mind, some financial institutions do sanction a higher amount.
How Does the Applicant’s Age Impact His/Her Eligibility for a Home Loan and Property Loan?
When it comes to salaried and professional borrowers, the age group-related parameters for the potential borrowers also notably diverge.
To elaborate, such individuals have to be between 28 and 58 years in order to avail a loan against property – with the upper age limit signifying how old the borrower would be at the time of the loan maturing.
However, if such borrowers want to apply for a housing loan, they must be under the age group of 23-62 years.
Difference Between Loan Tenor for a Housing Loan and a Loan Against Property
The repayment tenor of these two aforementioned kinds of secured loan also varies significantly. For example, a loan term’s longest period is generally limited to around 15 years when it comes to a LAP. However, the tenor can extend for as long as up to 30 years for home loans.
Different Tax Exemption Rules Regarding a Home Loan and Loan Against Property
Provisions under Section 80C and Section 24 of the Income Tax Act makes certain borrowers eligible for tax exemption against a home loan.
Likewise, under Section 24(B) and 37(1) borrowers availing a LAP are eligible for tax exemption.
The aforementioned aspects of property loans vs. home loans can therefore substantiate the key differences between them. So, when a borrower is opting for any of these two methods of secured loan, considering these facts can help him or her avail the most favourable financial recourse.