Home Loan and Loan Against Property are two different types of loans but sound similar due to the terms used in denoting them, often creating confusion among people. Both home loan and loan against property are drawn against a property, so what are the differences between the two loans?
We are here to help. We bring to you everything that you should know about the differences between home loans and loan against property.
Purpose of the Loans
A home loan is availed to fund a property that you are looking to buy/construct or for buying a plot of land, whereas loan against property is the one where you avail a loan against an existing property. In other words, the property is mortgaged to the lender and the borrower draws funds against the property.
The purpose of a home loan is clearly defined and it can be only used for the purpose specified, i.e. buying a new property. But the end use of the loan against property is open-ended. Just like a personal loan, it can be put to use for different purposes, like funding or expanding a business, funding education, catering to a medical emergency, meeting expenses of a wedding, etc.
Loan against property can be availed even to fund another property, that could either be a commercial or a residential property. One can avail a lump sum loan against property or even use it as a line of credit for a specified period of time
Rate of Interest
Home loans come under priority sector lending and as they are secured loans backed by a property, the rate of interest charged on a home loan stands between 8.5 -12% depending on the lenders and the credit profile of the customer. Home Loans are linked to Marginal Cost of Funds based Lending Rate (MCLR).
On the other hand, loans against property are not considered a priority sector because of the open-ended utilization of the loan. Hence the rate of interest charged is higher than home loans. Currently, the interest charged stands at 10-15% depending on the lenders, the property being mortgaged and the credit profile.
However, the rate of interest charged for a loan against property is lower than that charged for a personal loan, which is an unsecured lending.
Tenure of the Loan
Both loan against property and home loans are long-tenure loans.
These days, lenders allow longer tenure of up to 30 years for home loans. But loan against properties are not allowed such long tenures. Maximum tenure offered for loan against properties are up to 15 years, which can vary depending upon many factors like credit profile of the borrower, age and condition of the property being offered for mortgage, the amount of loan being availed, etc.
Loan to Value Ratio
Every loan requires some margin payment from the borrower’s end which signifies their commitment towards the loan. Same is the case with both home loan as well as loan against property. Both require certain amount of margin payment. The margin amount also protects the lenders against drop in the market value of the property.
RBI issues regulations for bankers on the minimum percentage of margin money that requires to be collected from the borrower in case of home loans. The maximum percentage of loan amount that is allowed is 90%, which means the rest 10% will have to be brought in by the borrower. This figure may be raised to as high as 25% for high-ticket loans or when it comes to those with low credit scores.
In the similar fashion, National Housing Bank puts in the margin requirements for Housing Finance Companies, which is also almost on lines of the margin requirements set in by RBI.
However, when it comes to loans against property, the margin requirement is of a higher level, as it is not categorized as priority sector lending. So, the margin requirement can range between 24-40% of the property value.
For Example: Suppose you wish to avail loan against a property which is valued at Rs 70 lakhs. Your lender sets in the margin amount at 35%. So, the maximum of loan that you can avail against the property will be Rs 45.5 lakhs.
Of late, there has been a tremendous growth in the Loan Against Property Segment of loans. However, delinquencies in this segment has outpaced other loans. As per the borrower data analyzed by CIBIL TransUnion, defaults grew from 2.3% to 3.03% on a year on year basis in the Loan Against Property segment. On the other hand, defaults in the home loan segment barely grew from 1.51% to 1.73%.
In face of growing defaults, lenders may be obliged to increase the margin requirements from the borrower.
Documentation Involved and Ease of Approval
Both the loans are based on real estate or immovable properties, hence the need for documentation is obviously extensive. However, in comparison, a home loan requires less documentation and have quicker approval process, especially when buying through a known developer or if it is a pre-approved project.
But when you apply for a loan against a property, the documents required may be much more in comparison, which changes depending on the type of property being mortgaged. The lender will need to do a thorough check on the title of the property and encumbrances, if any. If the property is jointly held, a consent will be required from all owners. If it is an inherited or a willed property, there might be chances of disputes in future. Since a lot of legal issues may be involved, the approval process for a loan against property may take longer than a home loan.
Income Tax Benefits Allowed
As you all know, income tax benefits on home loans are a huge benefit. Income Tax benefit is available both on Principal repayment under Section 80 C of Income Tax Act (under the overall limit of Rs 1.5 lakh) and for payment of interest up to Rs 2 lakh under Section 24 of Income Tax Act.
In fact, if a home loan is jointly availed by spouses or other qualified people as co-borrowers and they are co-owners, all of them can avail the tax benefits in the proportion that they repay the loan.
You may be eligible for some tax relief on the loan against property depending on the usage of the loan.
If the proceeds of the loan are used for business, then the interest paid and other incidental expenses such as processing fee or document verification fee may be shown as business expenditure under Section 37 (1) of the IT Act.
If the proceeds of the loan against property are used for funding a marriage or medical emergency, there are no benefits available on the Income Tax front.
If the loan from property is used to purchase another property, then you are allowed to claim deduction on the interest paid on the loan, but you would need to clearly establish that this money was used to fund the new property. However, in this case, you lose out the principal repayment benefit, as loan repayment is not considered equivalent to principal being repaid on a home loan.
Loan against property may be a good option when you need a big-ticket loan and are looking for rates of interest less than a personal loan. However, you have to bear in mind that if you are unable to pay back the loan on time, you might end up losing your property.