Although the difference between a home loan and loan against property is quite evident through their names, many people still get confused between these two. In simpler terms, you can avail a home loan to purchase a new property whereas loan against property is availed against your already owned property.
Before we could go into the details of which might be the best option for you, let’s understand the fundamental differences between the loan against property and home loan on the basis of the purpose, interest rate, tenure and much more.
Differences Between Home Loan & Loan Against Property:
|Criteria||Home Loan||Loan against Property|
|Purpose||To buy a new house or property or commercial establishment||A loan against existing property|
|Interest||7.90% – 21.00%||8.80% – 24.00%|
|Quantum of Loan||90% of the property value, in most cases||60% of the property value, in most cases|
|Tax Exemption||Under section 24 on interest and 80C on the principal||Applicable only on interest|
|Tenure of Loan||Up to 30 years||Only up to 15 years|
|Loan Processing||Smooth processing||High restrictions and stringent processing|
|Prepayment Charges on Loan||Relaxation offered as per RBI guidelines||Charges are applicable|
|Monitoring of the property||Strict monitoring by banks/NBFCs||No monitoring by the lender|
|Nature of Property||For residential purposes only||For Commercial, Residential and Industrial purposes|
Let’s discuss the critical aspects of both home loan and loan against property to determine which might be the best among the two:
1. Interest Rate: When it comes to interest rates, Home loan, as compared to loan against property, is offered at comparatively lower interest rates. Loans against property are provided at higher interest rates, as the chances of default are higher in this case. You can avail a home loan at as low as 7.90% onwards, whereas loan against property is offered at minimum as 8.80% onwards.
2. Loan-to-Value (LTV): If you are considering loan against property, you would be granted upto 60% of the property value while in case of home loan, you can avail maximum upto 90% of the property value.
3. Usage of loan: Home loan can be availed for various purposes, such as buying a home, plot, under-construction property, and so on. Loan against property can be used for business and personal needs and is sanctioned based on the existing property.
4. Practices to Avoid: You cannot use the amount received under loan against property for other purposes, such as gambling, speculative business activities, buying or selling of shares, stock market, and any other suspicious activity.
5. Tenure: Home loans can be availed upto a maximum of 30 years; however, loan against property is provided for maximum upto 15 years.
To further the argument and before you use the property loan calculator to determine the best rates, let’s try to list the benefits of home loans and loan against property separately:
Benefits Of A Home Loan:
- You can get your dream home
- You can avail better tax benefits
- There are no prepayment charges, in most cases
- There is a balance transfer facility available
- High repayment tenure
- Property appreciation factor
Benefits Of Loan Against Property:
- Able to leverage property value for personal & business use
- Low EMIs
- Availability of immediate funds
- Flexibility in tenure
- Easy balance transferring
- Quick approvals
Conclusion: Now that you have understood the various aspects related to both home loans and loans against property. While getting a home loan has advantages, loan against property can be helpful in some instances. If in case, you are trying to take up a loan against property to purchase a new property, you might not have benefits claimed by a home loan.
However, since the loan against property interest rates are significantly lesser than interest rates of a personal loan, you can consider such property loans for various purposes. There might be a few instances, where your home loan approval might encounter roadblocks. In such cases, loan against property comes in handy.