Home Loan v/s Loan against Property: An Exhaustive Comparison

When looking for financial assistance to pay off some huge expenses, two widespread terms come into the picture that helps pay off large bills: home loan and loan against property (LAP). Although the term ‘home’ seems to be associated with both, they present two different purposes and features differently. The time has come for you to know the differences between them, and the distinction will help you reach a proper decision about which fits your situation.

What is a Home Loan?

A home loan is an amount of money borrowed to buy, build, or renovate a house. Banks and lending institutions lend a percent of the market value of the property. The percentage may vary, usually in a range of 75-90% of the value, depending upon your eligibility, credit score, and the nature of the property.

Key Features of Home Loans:

1. Purpose: The primary purpose of a home loan is to enable the borrower to buy or construct a dwelling. It is strictly tied to the real estate industry and cannot be utilized for other monetary needs.
2. Amount Disbursed: The amount disbursed is a function of the cost of the property involved. Lenders normally advance 75-90% of that as the loan amount.
3. Interest Rate: The interest rate associated with home loans is always low, compared to any other loan as the tenure is very long and lenders face minimal risk. The type of interest fixed or floating may depend on the terms of the loan.
4. Tenure: The tenure of home loans is always high; a loan can range from 20 to 30 years, so the monthly EMIs have to bear, and these happen to be very low in the case of home loans.
5. Tax Benefits: The salient feature of the home loan is tax benefit under Section 80C and Section 24 (b) of the Income Tax Act; consequently, borrowers, who advance tax claims on principal and interest repayment, can avail themselves of tax benefits most efficiently.
6. Ownership: Owning the house is retained by the borrower, and the lender enjoys a lie over the property, which he can enforce to get back the loan if the borrower defaults.

What is a LAP [loan against property]?

On the other hand, a loan against property, popularly known as LAP, is a secured loan, wherein you mortgage your residential or commercial property to get a loan for any personal need or business requirement. Unlike a home loan, the LAP is not limited to use for real estate. The money acquired can be used to expand businesses, fund education, undertake medical treatment, or even to pay off some loans.

 Important Features of Loan Against Property

1. Objective: LAP is an application that helps achieve any sort of financial requirement, be it to meet business needs, personal expenditure, medical emergencies, or higher education, making the borrower flexible.
2. Loan Amount: The amount sanctioned under LAP is mainly based on the market value of the property you mortgage. Banks generally lend up to 60-70% of the property value, which varies with the property and the borrower’s eligibility.
3. Interest Rate: Interest rates in LAP are more than the home loans but less than those of an unsecured loan like personal loans due to security. Thus, it is one of the most cost-efficient borrowings for big-time financial needs.
4. Tenure: LAP tenure with respect to the home loans is usually for a short term like 10-15 years. Repayment tenure may be prevalent at the discretion of the lender.
5. Tax Benefits There are no specific tax benefits in the case of a loan against property unless you are using it for business purposes. In the latter case, you can claim a part of the interest paid as a tax deduction.
6. Ownership: Though LAP does not give you to lose the title of the property during the term, the legal charge is held by the lender. In case of default, the lender could liquidate the property to recover his outstanding loan amount.

Differences Between Home Loan and Loan Against Property

1. Objective: Home loan is taken only for the purchase or construction of the property, while in LAP it can be used for any financial objective.
2. Interest Rates: Home loans are usually provided with lower interest rates than Loans Against Property due to which they intend to promote ownership in the house.
3. Loan-to-Value (LTV) Ratio: The LTV for home loans is much higher, like 90% compared to LAP, which can provide anywhere between 60-70% of the value of the property.
4. Tax Benefits: The entire principal and interest repayment can have tax benefits in the case of home loans. In the case of LAP, tax benefits will only be available under certain conditions.

It would depend on your requirements and goals whether it makes more sense to opt for a home loan or a loan against property. If you intend to buy or construct a house, then the housing loan would be apt as it has tax benefits and lower interest rates.

The loan against property is available if you need a significant sum of money for other personal or business expenses and you own a property. Always remember to consider the financial situation, repayment capacity, and future goals before opting for either of these loans.