Loan against property vs. Home Loan- Which is Better for You?

Introduction

A financial crisis can strike you anytime, anywhere. A loan comes to your rescue before anything else. Out of the various types of loans, a loan against property is the most popular, as it is approved faster than other loans, comes at attractive interest rates, and offers flexible repayment terms.

This article compares a loan against property with a home loan and helps you to choose the best one for you when you are in need of urgent cash business lines of credit.

Home Loans

You can avail of a home loan when you need- funds to purchase a newly constructed house, to buy a new house, or to buy land where you intend to construct a house.

Properties of a Home Loan

• You have to acquaint yourself with the loan jargon and financial terms used in the home loan application process.

• You may apply for a home loan when you intend to purchase or construct a house.

• Home Loans can also be subscribed to if you want to fund a property under construction or to buy a piece of land where you intend to build your house.

• Loans like these are offered by financial institutions and housing finance companies.

• You have to pay at least 10% of the property value as a down payment.

• An interest rate of about 9% is charged by the lender. The home loan interest rate can be either fixed or floating.

• The EMI repayment tenure can be up to 30 years.

• Home loans come with various tax benefits.

Home loans are expensive loans. In the light of a non-payment of the EMIs or interest, the lender can take harsh measures. The lender might auction the property in question to recover the losses.

Loan Against Property

A loan taken against property is a kind of mortgage loan. To avail a mortgage loan, you have to keep your existing property as collateral with the lender, who can liquidate the asset if you are unable to pay back the interest and principal.

Properties of Loan Against Property

• The borrower mortgages his/her residential or commercial property for a certain amount of money.

• This amount is generally equivalent to up to 60% of the market value of the property s/he owns.

• The documents of the mortgaged property have to be handed over to the bank.

• The financial institution keeps the documents till the time the loan is completely paid off.

• The payments have to be made regularly, just like any other loan. In case of any default, the lender can auction the mortgaged property to recover the losses arising from the non-payment of the dues.

• The funds can be used for any purpose.

• Loan against property interest rates can be anywhere between 9% and 24%, depending on multiple factors like net income, the stability of business or employment, and debt to income ratio, among other things.

Loan Against Property vs. Home Loan

Purpose

A loan against property and a home loan serve different purposes. 

• Home loans are availed for purchasing a house, a piece of land, or a property under construction.

• A loan against property is used to raise funds for personal reasons such as education, business funding, funds for marriage, etc. However, you can also use it to purchase or construct a house.

Thus, the scope of a loan against property is more than a home loan.

Interest Rates

The rate of interest plays a decisive factor when it comes to loans. The interest rate on loans against property is slightly higher when compared to a home loan. But, with a marginally higher interest rate, you get increased convenience in the form of no questions asked for loan utilization.

Loan Limit

In the case of home loans, you can get up to 90% of the total value of the property. But, when it comes to a loan against property, one can only get up to 60% of the value of the property mortgaged.

Tax Exemption

Home Loan

Under Section 80C, you may claim a tax deduction of up to INR 1.5 lakh on the principal repayment. You may also claim tax deductions of up to Rs 2 Lakhs on the interest payments. Section 80EE allows you to avail an additional INR 50,000 worth tax benefits if you are a first-time homebuyer.

Loan Against Property

Unlike home loans, you cannot get tax benefits on principal repayment. You may use the provisions of Section 37(1) to claim tax benefits if you use the funds for business purposes. If, however, you plan to use the funds to finance a new house, then the provisions of Section 24 would apply.

Loan Tenure

Home loans generally offer you repayment tenure of up to 30 years. In contrast, the maximum tenure for a loan against property is generally 20 years.  

Which is Better?

If you intend to buy a house or a property, your best bet would be a home loan.

On the other hand, if you are looking forward to raising quick cash for personal use, it’s better to go for a loan against property. The process is less cumbersome, and the loan is granted with ease.