When it is about home loans, there may be various financial terms that may confuse you. Mostly, you may tend to get confused between a loan against property and a home loan and their benefits and features. Read on to know the difference between both the loan options.
Home loans through HDFC home loan, SBI home loan or any other home loan lenders are majorly availed for buying a home, plot, property, under construction land etc. A loan against property by nature is secured, which assists you in mitigating your business and personal requirements by pledging your real estate property. A loan against property can be utilized for different purposes like business expansion, marriage in the family, holidays, funds for treatments, higher education for kids etc. To mitigate any financial goals or exigencies, individuals prefer to apply for a loan. Banks and various other financial lenders provide different loan products for distinct life events. You require knowing that there is a massive difference between loan against property and home loan options. Let’s know the difference here.
What is meant by a loan against property?
A loan against property is a kind of loan that permits you to use the loan proceed to mitigate your financial needs for any life event, to finance your business or start-up, for any personal requirement or medical exigency. The sanctioned loan proceeds depend on the property value. In this, the borrower can pledge their self-owned or existing property for proceeds that are equivalent to a particular percentage of the market value of the property owned. It is known as LTV or loan to value.
As suggested by the name, the borrower must mortgage the property against loan proceeds. The borrower must provide the property details and documents to the bank lender until the loan is completely repaid, and if the borrower defaults on any repayment, the lender has the right to sell off the mortgaged property to gain the amount provided as a loan.
Also Check: SBI Home Loan
What is meant by a home loan?
A home loan is a credit option generally availed by potential homebuyers who want to purchase a new plot, home, or finance an under-constructed property. It is the loan provided by housing finance companies or banks, and hence the buyer must make the down payment. The lender charges a floating or fixed rate of interest on the loan. This makes the buyer liable to repay the loan in the form of monthly EMI.
The lender owns the property till the borrower pays the loan EMI, after which the ownership is formally transferred to you. In case you default on any loan EMI, the lender can auction your home to recover the losses incurred in lending you the funds.
Loan against property vs home loan –
Rate of interest – A home loan is provided at a comparatively lower rate of interest than a loan against property. The interest rates in both the credit options vary from one lender to another. One of the main differentiators is the interest rate that is being charged to you. Usually, the loan against property rate of interest is higher than the rate of interest charged on the home loan. This is often because banks and lenders feel that the chances of an individual defaulting on a loan against property are higher. Moreover, the RBI and the Indian government always strive to make sure that housing must be affordable to all. Thus, efforts have been made to lower home loan costs.
Usage – While home loan has limited uses, they usually can be taken up just for purchasing a home, plot, or property under construction, while loan against property is for multipurpose reasons. Anything from funding your child’s higher education or marriage to expanding your business can be performed in the case of a loan against property. A loan against property is basically secured in nature as you must provide your land or property as security to avail of the loan.
Loan to percentage value – Next crucial difference is that LAP offers you nearly 60 – 70 per cent of property value, while for a home loan, this specific figure can go as high as 90 per cent.
Loan to value (LTV) – LTV (loan to value) is the maximum limit of a loan approved by a lender in comparison to the property’s market value. Usually, banks approach the property site before disbursing the home loan. Property valuation is conducted in the case of a loan against a property option.
Prepayment fees – According to the guidelines by the Reserve Bank of India, lenders hold zero right to charge any fee for the loan prepayment based on the floating interest rates. However, fixed-rate loans may hold prepayment charges.
Nature of the property – The home loan can be availed for residential reasons only. Whether it is a ready-to-move-in property or property for renovation or expansion, the loan is provided just for the property utilized or to be utilized for residential reasons. However, in the case of loans against property, loans can be availed just against residential, commercial, or industrial property. Property documents are kept with lenders as security or collateral, which is given back to you upon successful completion of loan repayment.
Purpose – Next major difference between a loan against property and a home loan is the purpose for which this loan is availed. A home loan is generally availed to purchase a home, plot, or under-construction property. On the contrary, a loan against property permits you to mortgage the existing securities in exchange for the required money to meet different personal purposes like business expansion, child’s marriage or higher education, medical expenditures etc.
Repayment tenure – A home loan can be availed for a maximum period of at least thirty years, but a loan against property can be availed for up to a maximum of fifteen years.
Availability of top-up option – Top-up option is available on the home loan. With this top-up option, you can meet your different personal requirements like funding your financial mismatches, shortages etc. Top up option may not be available in the case of a loan against property.