Loan Against Property Vs Home Loan: Which One Should You Choose?

To meet various financial needs, people need to apply for certain types of loans. And for this, people may approach banks or NBFC (Non-Banking Financial Company) to apply for loans. However, it is important for the borrowers to understand the types of loans before applying for one. So if you are planning to apply for a home loan then you need to understand two terms in detail - loan against property and home loan.

Table of Content

• What Is A Property Loan?
• What is a Mortgage Loan?
• What are the differences between Home Loan and Mortgage Loan?

What Is A Property Loan?

A property loan is a financial arrangement where a borrower receives funds from a lender to purchase or construct a property, which serves as collateral until the loan is repaid. It includes options like a home loan and a mortgage loan. Home loan is used to buy residential properties whereas mortgage loan is also used for commercial properties. These loans come with fixed or floating interest rates and repayment tenures. In India, banks and NBFCs offer tailored loan plans based on income, credit history and property value.

What is a Mortgage Loan?

A mortgage loan is a type of secured loan where a borrower pledges real estate property as collateral to obtain funds from a lender. This loan is used to purchase, construct, or renovate residential or commercial property. The borrower repays the loan in monthly installments over a specified tenure, including interest. If the borrower defaults, the lender has the legal right to seize the property. Mortgage loans are popular for long-term financing, offering competitive interest rates and flexible repayment options. They play a crucial role in helping individuals achieve property ownership or unlock funds for personal or business needs.

What are the differences between Home Loan and Mortgage Loan?

When exploring financing options, understanding the difference between home loan and mortgage loan is essential. Both are secured loans, yet they differ significantly in purpose, benefits, and terms. A home loan is usually available to purchase or construct a new property, whereas a mortgage loan, often referred to as a loan against property, is borrowed against an existing property for personal or business needs. Knowing these differences can help borrowers choose the best-suited financial product. Let’s delve into the key distinctions between home loan vs loan against property across six important parameters.

1. Interest Rate

Interest rates are a crucial factor when comparing the two loans. Typically, a home loan has a lower interest rate since the end-use is predefined and secured with the property being purchased. Banks and financial institutions view these as low-risk due to their purpose. On the other hand, a mortgage loan, or loan against property, carries a slightly higher interest rate. This is mainly because the loan can be used for varied purposes like business investment or education, which poses greater risk to the lender. 

Suggested Read: 8 Tips To Reduce Home Loan Interest Rates

2. Loan to Value (LTV)

Loan to Value determines the percentage of the property’s value that a bank will finance. For a home loan, lenders usually offer up to 80–90% of the total cost of the property. This high LTV is possible because the property purchased becomes the collateral. In contrast, with a mortgage loan, lenders generally offer only 60–70% of the market value of the mortgaged property, given its pre-owned status and higher risk factor. This is a key consideration when using a loan against property EMI calculator to plan repayments.

Suggested Read: How is Loan to Value beneficial for you?

3. Usage

The usage of funds is one of the most distinguishing factors. A home loan can only be used for buying a house, constructing a property, or undertaking home renovations. It is a purpose-driven loan, and lenders verify end-use during disbursement. In contrast, mortgage loans offer greater flexibility. The borrowed funds can be used for multiple purposes, such as funding a wedding, expanding a business, or covering medical emergencies. This flexibility makes loan against property a go-to option for many self-employed professionals and entrepreneurs.

4. Tenure

The home loan minimum tenure starts at 5 years and can go up to 30 years, depending on the lender and borrower’s profile. The extended repayment period ensures lower EMIs, making it ideal for salaried individuals. In the case of mortgage loans, the tenure is typically shorter, usually ranging from 5 to 15 years. This is because the loan is secured against an existing property, and lenders prefer quicker repayment cycles due to the broader usage scope of the funds.

5. Documentation

Documentation requirements vary slightly between the two. For a home loan, you need to submit property sale documents, builder agreements, sanctioned plans, and income proof. The focus is on verifying the credibility of the property and the borrower. For a mortgage loan, documentation includes ownership proof of the property being mortgaged, a clear property title, valuation reports, and income proof. Given that an existing asset is being used as collateral, more emphasis is placed on ownership and legal clearance of the property.

6. Taxation

Home loans come with attractive tax benefits. Under Section 80C of the Income Tax Act, principal repayments qualify for deductions, and under Section 24(b), interest payments are also deductible. This makes home loans an efficient tax-saving tool for homeowners. However, a mortgage loan does not offer similar tax benefits unless the funds are used specifically for business or income-generating purposes. It is crucial to assess these implications before selecting between the two options.

Using tools like a loan against property EMI calculator is essential for calculating monthly obligations and choosing the right financing option. Ultimately, understanding the difference between home loan and mortgage loan can help you align your choice with your financial goals.