The terms ‘home loan’ and ‘loan against property’ are often used interchangeably. However, both these types of loans are completely different from each other. Each of these loans comes with a specific procedure, requirements, benefits and drawbacks. When you take out a home loan, the bank lends you a certain amount of money to pay for a house, which you have to pay back in monthly installments. When you take out a loan against property on the other hand, you’re mortgaging that property as security in case you aren’t able to pay back the loan. So how do you know which type of loan is right for you? Here are a few crucial differences between the two which will help you decide.
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The purpose of each
When you take out a home loan, the bank is lending you money to buy or construct a new home. In this scenario, you don’t need to already have property in order to qualify for a home loan. However, when you take out a loan against property, you’re already the owner of property, which you are offering up as security to avail a loan. In both loans, you will need to pay back the loan in monthly installments. However, in the case of a loan against property, if you aren’t able the pay back the loan; you can surrender your property to the bank instead.
The amount loaned
In an effort to enable people from all income groups to buy a home, the RBI lets banks loan you up to 80% of the funds required. This means that you will only need to save up 20% of the house’s value. In the case of a loan against property, banks usually offer you only up to 60% of your property’s value. So the amount you’re eligible for under a loan against property depends entirely on the value of your property.
Interest rates
Home loans generally have a much lower interest rate than loans against property. Most home loans have an interest rate of only about 8.75% to 13%, depending on the type of interest you choose. This is again in line with RBI’s policy of making home ownership accessible to all. When you take out a loan against property, however, you might end up paying interest that is as high as 15.75%.
Repayment tenure
Home loans are much easier to repay because they have a long tenure. Most home loans extend up to 30 years. This helps you pay much less each month and reduces the tension of having to repay it quickly. Loans against property, however, rarely ever extend to more than 15 or 20years. If you do not pay back your loan within the specified time period, the bank can seize the property you offered up as security.
Tax exemption provisions
Home loans do come under tax exemptions, while loans against property do not. If you’re paying back a home loan, then you come under two separate tax exemptions: section 24 for interest and section 80C for the principal. Tax exemptions are not available in most cases for loans against property. However, if you took out a loan against property for the sake of your business, then your interest can come under tax deductions if you list it as ‘income from business and profession’. There is no such tax exemption available for the principal amount though.
Monitoring by banks
In the case of a home loan, banks closely monitor the usage of funds to make sure you aren’t misusing the money for any other purpose. Money obtained from home loans can only be used for the purpose of buying or building a house. In some cases, they can also be used to renovate or repair damages in a home. In the case of a loan against property, banks do not monitor the uses to which the funds are being put. People who take a loan against property can utilize the money for anything they wish except gambling and stock market investments.
Now that you know how home loans and loans against property differ, you can decide which best suits your needs. If you’re thinking of applying for a housing loan to buy your dream home, visit Lancor. Our unmatched construction, beautiful homes and perfect locations are everything you ever wished for!