- A home loan is taken to purchase a new property whereas loan against property is taken against your already owned property.
- A home loan and loan against property are two different products, understand the difference and then apply as per your requirement.
Even though the difference between a home loan and loan against property is visible through their names, many people still get confused between the functioning of these two. If you have taken a home loan or mortgage loan before, you might not feel the urge to know more details. But, those who do not have the basic understanding of these two loans must read this article.
Difference Between a Home Loan and Loan Against Property or Mortgage Loan
Here we have given the features of a home loan and loan against property. The factors based on which these two products vary are – purpose, interest rate, quantum of finance, tax exemption, tenure, processing time and fees, prepayment charges, and nature of the property. Based on these factors, the comparison has been done. So, read below to know everything about them.
Home Loan Definition
A home loan or housing loan is a facility through which you can get funds to buy a house by paying a small portion as the down payment and continuing repaying the loan up to the selected tenure. The loan is availed on the basis of the current value of the property by considering many factors such as the age and income of the applicant, credit or CIBIL score and history, property location, professional stability and employer category.
Home Loan Types
You can get a housing loan from the lender for the following purposes:
- Home purchase
- Land purchase
- Plot purchase
Interest rates on Home Loans
The rate of interest on a home loan is decided on the basis of the property value and income of the applicant. Those having a higher income, good CIBIL score, and work in an MNC have chances of getting a lower rate as compared to those who lack these things. The rates are available in two forms – floating and fixed. Fixed interest rates are fixed for a particular time and the EMI will be deducted on the basis of this rate for the total tenure. The interest and principal portion will be constant for the whole tenure. However, the amortization varies for home loans on floating rates. The principal and interest portion applicable on a home loan (floating rates) is variable.
Maximum Loan amount you can get on a housing loan
As per the guidelines issued by RBI, the maximum loan amount a person can get through a home loan ranges from 75%-90% depending on the loan to value ratio.
Tax Exemption on Home Loans
Under Section 80C of Income Tax Act, a home loan borrower can get tax exemption up to Rs. 1.5 lakhs on principal repayment amount. The borrowers can also get additional exemption on tax up to Rs. 2 lakhs on the interest amount under Section 24.
Tenure available for a home loan
The maximum repayment period allowed for a housing loan is 30 years. The borrowers can choose the tenure as per their repayment capacity.
Loan Processing Time and Fees
Since it is a secured loan, the lender will have your house or home as a collateral till the time the repayment is complete. The loan processing fee also varies from one lender to another. The processing fee is a one-time fee which is maximum up to 1.5% of the loan amount. There is an additional GST which is 18% of the processing fee.
As per RBI guidelines, lenders cannot charge any fee for the prepayment of any loan based on floating rates. However, the loans with fixed rate of interest do have some prepayment charges.
Nature of the property
Housing loans can be taken for the residential purposes only. Be it a ready-to-move property or a land purchase or extension or renovation, the loan is granted for a property used or to-be-used for residential purposes only.
Balance Transfer Facility
A home loan borrower has the option to transfer it from base rate to MCLR and also from a higher rate lender to another lender offering much lower rate. Some banks such as SBI presently have zero processing fee on balance transfer but generally, there is a fee involved.
Home Loan Top-Up
It is said that a top-up on a home loan is better than applying for a new personal loan or gold loan. You can use the amount for any legitimate purpose by just adding into a minimal in the present EMI. To avail a top-up, you must have paid regular monthly installments of your home loan for at least 1 year.
Loan Against Property Definition
As the name suggests, a loan taken against a property or mortgage is defined as a loan against property. The main difference between a home loan and loan against property is that a home loan is taken for the property and mortgage loan is taken against the property. The loan is given on the basis of the property value as per the market. You can use the fund for any legitimate purposes be it an emergency or a planned expenditure such as business expansion, marriage, travel or medical purposes.
Interest rates on Loan Against Property
The interest rates applicable on loan against property are fixed as well floating. Just like a housing loan, a borrower can choose which rate system is convenient for them. The rates are, however, quite high as compared to home loans.
Maximum Loan amount you can get on a mortgage loan
Unlike a home loan where you can get a maximum of 90% loan amount, the maximum limit for a loan taken against property is 60% of the property value. The amount may vary depending on the property location and income of the borrower.
The borrowers get no tax exemption for their mortgage loan. So, if you think that just like a home loan where there is an added advantage for borrowers to get tax exemption u/s 80C & 24(b), there is no such advantage with a loan taken against property.
Tenure of the loan
The maximum tenure available for a loan against the mortgage of the property is 15 years. You can choose a tenure for the loan between 1 year to 15 years or less.
Loan Processing Time and Fees
Since the loan is sanctioned by keeping the property as a collateral, the processing is smoother. However, there is a loan processing fee which in general is maximum up to 1% of the loan amount + GST (18% of the processing fee).
Lenders can not charge any prepayment fee for any loan linked to floating rate of interest. But, there is a fee for loans linked to fixed rate. Any individual borrower or co-borrower can prepay his/her loan against property without paying any fee.
Nature of the property
The loan can only be taken against a commercial, residential or industrial property. The property documents are kept as collateral with the lender which are returned only after successful completion of the repayment.
Comparison between Home Loan and Loan Against Property
Below is a table showing the difference between a home loan and loan against property.
|Criteria||Home Loan||Loan against Property|
|Purpose||A loan to buy a new house or property||A loan against owned property|
|Interest||6.70% - 14.00%||8.45% - 16.00%|
|Quantum of Loan||Up to 90% of the property value||Up to 60% of the property value|
|Tax Exemption||Under section 24 for interest and 80C for principal||Applicable only on interest|
|Tenure of Loan||Up to 30 years||Only up to 15 years|
|Loan Processing||Smooth processing||High restrictions and stringent processing|
|Prepayment Charges on Loan||Relaxation offered as per RBI guidelines||Charges are applicable|
|Monitoring of the property||Strict monitoring by banks/NBFCs||No monitoring by lender|
|Nature of Property||For residential purposes only||For Commercial, Residential and Industrial purposes|