Home Loan vs Loan Against Property: Key Differences and Benefits

6 minutes

When it comes to large financial decisions, choosing between a home loan vs loan against property can often be confusing. Both options are secured loans and help in meeting different financial needs. A home loan is meant for buying or constructing a house, while a loan against property allows you to borrow money using an already-owned property.

These loans are significant because they provide the funds needed for major expenses, whether it’s purchasing a home or handling personal or business-related costs. However, understanding the differences between the two is key to making the right choice for your situation.

What is a Home Loan?

A home loan is a type of loan specifically used to buy or build a home. It helps you purchase a ready-to-move-in house, an under-construction property, or even a plot of land where you plan to build your home. You can also use it to renovate an existing home.

This loan is secured by the property you are buying. The lender holds the property as collateral until you repay the loan in full. If you fail to repay, the lender has the right to take ownership of the property and sell it to recover the loan amount.

Home loans come with fixed or floating interest rates, and the borrower repays the loan in regular monthly installments (EMIs). The repayment period for home loans can be quite long, often up to 30 years, allowing you to spread out payments and manage them more easily.

What is a Loan Against Property?

A loan against property (LAP) allows you to borrow money by using your existing property as collateral. This type of loan is secured, meaning the lender holds your property as security until you repay the loan. The property can be residential, commercial, or even a piece of land.

What makes a loan against property flexible is how you can use the funds. You can use it for personal needs like funding a wedding or education, or for business purposes such as expanding your company or covering operational costs. There are no restrictions on how you spend the money, making it a versatile option for those who need substantial funds.

Key Differences Between Home Loans and Loans Against Property

When deciding between a home loan and a loan against property (LAP), it’s essential to understand the differences. Both serve different purposes and come with distinct features.

Purpose of the Loan

A home loan is meant only for buying or constructing a house. It helps you purchase a ready property or build your dream home. On the other hand, LAP is more flexible. You can use it for personal needs like education or weddings, or for business expenses, including expansion and operational costs.

Loan to Value (LTV) Ratio

With a home loan, you can borrow up to 90% of the property’s value, depending on the lender’s policy. In the case of LAP, the loan amount is lower, typically ranging from 60-70% of the property’s market value.

Interest Rates

Home loans usually have lower interest rates. The government offers incentives to make housing more affordable. LAP, however, has higher interest rates since the loan usage is more varied and poses a slightly higher risk to lenders.

Loan Tenure

A home loan offers a longer repayment period, with tenures extending up to 30 years. In contrast, LAP generally has a shorter tenure, ranging between 15 and 20 years, based on the lender’s terms.

Tax Benefits

Home loans come with tax benefits. You can claim deductions on both the principal repayment and interest under Sections 80C and 24 of the Income Tax Act. For LAP, tax benefits are limited. They apply only if the loan is used for business purposes or for buying another property.

Similarities Between Home Loans and Loans Against Property

Despite their differences, home loans and loans against property (LAP) share some common features. Both types of loans are secured, meaning they require property as collateral. Here’s what they have in common:

Secured Loans

Both home loans and LAP are secured by property. In a home loan, the property you’re buying serves as security. With LAP, it’s an existing property that you use as collateral.

Long Repayment Tenures

Both loans offer long repayment periods, allowing borrowers to repay the amount over several years. Home loans can stretch up to 30 years, while LAP usually allows repayment for up to 15-20 years.

Top-up Loan Facilities

Both loan types provide the option to apply for a top-up loan. If you have a good repayment history, lenders may allow you to borrow additional funds on top of your existing loan.

Which Loan Should You Choose?

Choosing between a home loan and a loan against property (LAP) depends on your specific needs and financial goals. Here’s a simple guide to help you decide which loan works best for you.

When to Choose a Home Loan?

If your goal is to buy a new house, a home loan is the best option. It’s designed to help you purchase a ready home, an under-construction property, or a plot for building your house. The interest rates for home loans are usually lower, and they come with long repayment tenures, making it easier to manage your finances over time. Plus, you can enjoy tax benefits on both the principal and interest payments.

When to Choose a Loan Against Property (LAP)?

A LAP is more suitable when you need funds for various purposes. It’s ideal if you’re looking to finance a business, pay for a wedding, fund education, or meet other large expenses. Since you use your existing property as collateral, LAP gives you the flexibility to use the funds however you need. However, keep in mind that interest rates for LAP are generally higher, and tax benefits are limited compared to a home loan.

Choose a home loan if your main goal is to buy a property. Opt for LAP if you need a large sum for other personal or business expenses and already own property that can be mortgaged.

Conclusion

Both home loans and loans against property (LAP) serve different purposes and have their own advantages. A home loan is ideal when you want to purchase or build a house, offering lower interest rates and tax benefits.

On the other hand, a loan against property is more versatile, allowing you to use the funds for personal or business needs, but it usually comes with higher interest rates.

It’s important to assess your financial situation and specific goals before deciding between a home loan or a loan against property. Make sure to choose the loan that best fits your needs and long-term plans.

Frequently Asked Questions [FAQs]