Everyone goes through a bad financial phase at some time or the other. When things get tough, people may have to apply for a loan to meet their expenses. The easiest and most popular way to get finance would be to mortgage a property. Applying for a ‘loan against property’ makes it possible to acquire lump sum money to pay medical bills, household expenses, etc.
However, what confuses most people is the financial jargon. That is why people struggle when it comes to choosing between a loan against property and a home loan. What really baffles people is the similarity in the name. For the common people, a property is almost synonymous with a house, and that’s where the problem arises. However, these are entirely different types of loans, and mixing up one with another could be disastrous.
Loan against property and home loan – how are they different?
If you are cash-strapped and need money, you need to apply for a loan against property. It is very different from a home loan in the following aspects:
1. Loan period
Given the high value of the real estate, home loan repayment tenure is usually quite long. The repayment period ranges from 5-30 years. However, for a mortgage loan, the maximum term is usually 15 years.
Loan-to-value or LTV is also different in the case of a mortgage loan. LTV is defined as the percentage of loan granted against the actual property value. Financial institutions usually grant 60% – 70% of the value of the property as a mortgage loan. But for a home loan, this can go up as high as 90%, which means you are better funded when you apply for a home loan.
3. Interest rate
The loan against property interest rate is also quite different from that of a home loan. Home loans warrant much less interest as compared with mortgage loans. This is because the government wants to promote affordable housing options for all. However, in the case of a mortgage loan, the chances of a default are relatively high, so financial institutions put a higher interest on these loans.
How you can use the loan amount is also different for these two different types of loans. You can use the amount granted under a home loan to buy a property under construction, a plot, a new home, or a resale property. However, in the case of a mortgage loan, the amount paid to you can be used in any way you like. The loan beneficiary has the discretion to use the money at his own will.
5. Tax exemption
When you apply for a loan against property, you can claim no tax exemption benefits. However, home loans come under the purview of tax benefits. According to Section 80C and Section 24, home loan beneficiaries receive tax exemption benefits for the principal amount and interest.
6. Sanction procedure
Home loans have significantly less sanction time because most financial institutions are eager to offer loans to credible people. For a mortgage loan, however, the sanction process takes quite some time. This is because officials will carry out elaborate checks and documentation before the loan is sanctioned. So, you will have a longer waiting time for a mortgage loan.
To sum it up
Mortgage loans or loan against property is an easy way to get money when in need. You can use it for medical emergencies, home improvement, business expansion, etc. The sanctioning authority has no control over how you spend the money, unlike in the case of a home loan. The higher the property value, the more will be the sanctioned loan amount.
However, one must consider that loan against property interest rate is comparatively high than that of a home loan. Meaning: you will have to pay more in EMIs spread over the entire tenure of the loan. While this is undoubtedly a downside to mortgage loans, there is an upside too. The interest rate charged is much less than that of a personal loan. The beneficiary can use the loan amount in the same way as that of a personal loan while still being the property’s actual owner.