Have you ever come across terms such as mortgage loan, home loan, property loan, and a loan against property? Have you ever wondered what do these mean? A home loan and a mortgage loan are same, and a property loan and loan against property (LAP) are one and the same. So what are a loan against property and a home loan?
Below-given are the differences between home loans and loans against property.
- Purpose of the loan
A home loan is taken to purchase a new or existing property, while a property loan is taken on a self-owned real estate property to fund financial needs. Thus, a home loan is specific in nature in terms of its utility. LAP, on the other hand can be utilized to fulfil a number of purposes such as wedding, education, business, travel, medical treatment, and more.
- Loan to Value
To obtain a home loan, the borrower has to pay the margin money. This margin money is also termed as own contribution or a down payment. The range for down payment is between 20% and 30% according to the credit profile of the borrower and terms and conditions by the bank/NBFC. Thus, when applying for a home loan, one can expect financing up to 60% to 80% of the amount required to purchase a house.
On the other hand, the loan to value ratio is up to 70% of the property’s current market value. As the loan is a high-ticket one, but secured in nature as a home loan, the LTV will differ as per the repayment capacity of the borrower.
- Fund Providers
Both the home loans and loans against property are offered by commercial banks and NBFCs. However the rates and fees are lower by public bank providers. For instance the SBI loan against property charges lower interest rates and fees to loyal or existing customers, than to new customers. Home loans are however expensive in terms of rates when taken from NBFCs.
In case of a loan against property, these are easier to avail from NBFCs and equally from public banks. The rates and fees would be more of less equal between both the types of providers. Eligibility criteria are also less stringent by NBFCs for LAP.
- The Interest Rate
Home loans come under the category of priority lending. Thus, the rate of interest is less compared to that of loan against property. Presently, the interest rate on a home loan is decided by MCLR (marginal cost of funds-based lending rate). The rate ranged between 8.5% and 12% according to the norms of the lending institution and the credit profiles of the borrowers. The rate for LAP is higher, between 10% and 15%.
- Tenure of the Loan
A property loan and home loan are both long tenure loans. The tenure for a home loan can be up to 30 years, while that for the former LAP can be up to 15 years or 20 years. The total cost of the loan depends on interest rate, loan amount, and tenure, thus, longer the tenure and other fees and charges, higher would be the loan cost, and vice-versa.
The above-mentioned 5 factors are the major differences between a loan against property and a home loan. Study these in depth and compare these factors across banks and NBFCs before finalizing a provider for the loan you opt for, be it a home loan or a property loan.