Having a home in your name can change many things. Not only a new address, but home also gives you an identity and respect in society. But, constructing or purchasing a house can often be beyond the financial capacity of an ordinary human being. Hence, they need a loan. However, once you lay your hands upon a house, you can also mortgage it to get money.
Sounds confusing? Read on to clear the confusion.
The two popular loans that you will frequently hear about from lenders and read on the internet are home loan and loan against property. The most elementary difference between a home loan and a loan against property is that while a home loan provides you money for buying or constructing a house, a loan against property allows you to mortgage your fully-constructed or freehold property for getting money. In both cases, the house acts as collateral security.
In essence, both are mortgage loans, which means you need to mortgage your house to get money. But, there are multiple differences between the two.
- Usage of Funds
A home loan provides you with funds for purchasing or constructing a house or buying a plot of land. Unless you apply for a special type of home loan which can allow you to carry out renovation or improvement of an existing property, a home loan is meant for just one purpose – the construction or purchase of a house.
On the contrary, a loan against property provides you funds at attractive interest rates for all purposes. You can use it for sponsoring a wedding, setting up a business, purchasing a house, buying a motor vehicle, paying hospital bills, or even for travelling abroad. Hence, you can get more liberty in terms of fund usage with a loan against property.
- Loan Amount
Loan amount, or the loan-to-value ratio, is the amount you can avail as a loan against the mortgage. In the case of a home loan, you can get up to 90% of the property’s value as a loan, if your loan amount is less than INR 30 lacs.
A loan against property, however, grants you a loan amount of up to 60% of the property’s market value. In principle, the amount may seem trivial as compared to a home loan. Still, as a loan against property considers the current market value of a fully constructed residential or commercial property, the loan amount may be substantially higher than a home loan.
- Interest Rate and Loan Term
When it is about the interest rate, home loans appear as the clear winner. Generally, home loan interest rates start from 7.50% and go up to 9.50%. Conversely, loan against property interest rates start from 9.50% and may go up to 10.65%.
On its face value, it may seem than home loan interest rates are much lesser than the interest rate offered by a loan against property. However, the calculation is far from easy.
A home loan comes with a loan term of thirty (30) years, while a loan against property has a loan term of twenty (20) years. Lenders often offer lower rates to borrowers who opt for a shorter loan term. Hence, back of the envelope calculations suggests that you can save more with a 20-years’ loan against property than a 30-years’ home loan. You can always use an EMI calculator to see the difference in numbers.
Notwithstanding their similarities and difference, both home loan and loan against property are the two most frequently availed loans in the industry. While the purpose of both loans is different, both provide you with money when you want to fulfil a dream or satisfy an obligation.