Many first-time home loan borrowers tend to confuse home loan with loan against property and use the terms interchangeably. However, while the terms sound similar, they are different financial products.
While home loans are a type of secured loan, you can avail of this loan only to buy or construct a new home. You can also use the loan to purchase a resale property. In contrast, when you apply for a loan against property or LAP, you already have ownership of the property, and you use it as a collateral to get funds against it.
In this write-up, we discuss the key difference between housing loan and loan against property.
When you apply for any type of loan, the interest rate is one of the important factors that could affect your borrowing decision. The higher the interest rate, the higher will be the EMI.
When it comes to home loans, the lenders today offer the loan at competitive interest rate. Today, you can easily get the loan at an internet rate starting from 6.70% per annum. On the other hand, the interest rate for loan against property can be higher than the home loan.
Hower, if you do your research well, and compare the offers from different lenders, you can surely find an offer that fits your budget.
Home loans are essentially long-term financial products. You can easily repay the amount over a longer period. Generally, the lenders in India offer home loans for a maximum period of 30 years. However, you have the flexibility to choose the loan tenure based on your repayment capacity. If you can pay a higher EMI, you can reduce the loan tenure.
In contrast, the repayment tenure for LAP or mortgage loan is much lower than home loan. You can avail of LAP for a maximum period of 15 years. However, it is a much longer tenure than personal loan, which comes with a maximum duration of 5-10 years.
LTV (Loan-to-value) Ratio
Another key difference between home loan and mortgage loan is the loan-to-value ratio. It refers to the maximum value that the lender funds against the value of the property.
When it comes to home loans, the lenders generally fund a maximum of 80% of the property’s value. You must pay the balance amount from your pocket. This is called down payment and it must be paid upfront.
For LAP, the financial institutions decide the maximum amount you can borrow based on their assessment of the property’s value. Generally, lenders do not lend more than 50% of the property’s value.
You can use the home loan only for buying a new ready-to-move property or an under-construction property. You can also use it to build your own house on the plot you own or allotted to you by the government.
When you apply for a loan against property, the lender does not have any restrictions on the usage. You can use the money for any purpose you want, such as increasing business capital, paying employees’ salaries, taking a world tour with your loved one, home renovation, paying your child’s college fees, etc.
Now that you are aware of the difference between home loan and LAP, you would understand that they are different types of loans and serve different purposes. So, assess your needs and choose the right type of loan to suit your specific needs.