Understand How Home Loan & Loan Against Property Differ
Secured loans are considered to be the safest type of debt both by lenders and borrowers. Lenders prefer it because they have huge security pledged with them to assure that the borrower will repay the debt. Borrowers prefer them because they can get larger sums of money at lower rates of interest and processing fees along with longer durations of time. The two most common types of secured loans offered by banks are Home Loans and Loans Against Property.
Considering that both loans have a property pledged as collateral, many people tend to get confused between the two. Home Loan and Loan against Property are two very different types of loan products. Let us discuss the differences between the two, and then we will take up an example from a prominent lender to see how the products differ.
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- Nature and purpose of loan: The nature of the transaction is the first and fundamental point of difference between the two. In Home Loans, the borrower is buying that specific property for the very first time. The loan is taken specifically for the purpose to pay the seller of the property. As a result, a major chunk of Home Loan is directly paid by the lender to the seller of property. In Loan Against Property, the lender is giving loan on a property that is already owned by the borrower, and the purpose of the borrower is to cater to any personal or business expense.
- Nature of property involved: The nature of the property involved in Home Loan is always residential. A Home Loan can be given for a flat or a house that may be ready to move in or under construction. Home Loan cannot be given for the purchase of commercial property though in some cases, many lenders will provide Home Loan for purchase of a plot of land, provided that it is legally marked for residential purposes only. Loan against property is also commonly given on residential property, but an increasing number of lenders are also lending on commercial properties, as long as some other conditions are also met.
- Loan percentage to property value involved: The loan percentage to property value is how much percentage of the property value a bank is willing to lend. Most lenders have set a maximum lending limit depending upon areas where the property is located. More importantly, almost all banks will be able to give Home Loans of up to 80% of the property value that the borrower intends to purchase. For Loan Against Property, most banks will offer somewhere between 60 to 65% of the property value for residential property and between 50 to 55% of property value for the commercial property being pledged. The final LTV may vary. If we look at criteria set by HDFC Bank, we find that HDFC Home Loan is available for up to 80% of property value, but Loan Against Property from the same lender is offered for merely up to 60 or 65% of property value.
- Interest Rates: Interest rates on Home Loans and Loans Against Property are both fixed and floating. However, whereas most of the Home Loan products come with floating interest rates and only some banks offer fixed interest rate Home Loans, the story is rather different in case of Loan Against Property. While most loans will still be floating interest rate loans, the percentage of fixed-rate Loans Against Property is still much higher. In any case, the interest rate on a Home Loan will always be anywhere between 1.5 to 2% lesser than the interest rate levied by the same lender on Loan Against Property.
For instance, the HDFC Home Loan interest rate is available at 8 to 8.50% while the HDFC Loan Against Property Interest Rates are 9.50 to 10.75% for salaried borrowers.
- Tenure of Loan: Tenure of loan is also a key differentiating factor between a Home Loan and Loan Against Property. Most banks and NBFCs offer Home Loans for at least 15 years to at most 25 years. Though Home Loans can go even up to 30 years in rare cases. Loan Against Property, on the other hand, is always offered for much shorter durations (though still much longer than other unsecured debts). Commonly Loans Against Property are offered for 10 years with the longest durations going to 15 years. Many banks also ensure that the loans are paid off before the borrower reaches a certain age.
- Tax exemption options for borrowers: The Home Loan is a great tax saving instrument. If you take a Home Loan, you do not have to pay any interest on the principal amount repayment. This deduction is offered under Section 80C for payment up to a maximum of Rs 1.5 lakhs per annum. Further, income tax benefits are also available on the amount paid for the registry of the property under the same section provided that the Rs. 1.5 lakhs limit is not reached through principal payments. Similarly, the interest paid on Home Loan is eligible to tax exemption up to a maximum of Rs 2 lakhs. No income tax exemption is available under any sections for borrowers of Loan Against Property.
- Prepayment charges involved: This is another area where the difference between Home Loan and Loan Against Property tends to depend upon variables involved in terms and conditions. As per RBI guidelines, no lender is allowed any prepayment charge for loans with floating interest rates. Considering that most Home Loans are floating interest rate loans, prepayment charges are not applicable. However, if you have taken out a fixed Fixed Interest Rate on Loan Against Property, you will be charged a prepayment charge depending upon lender regulations. Generally, this is anywhere between 1 and 3% of the outstanding principal amount. GST is also applicable on it.
- Top Up Options: A number of lenders can provide Top Up Home Loans for eligible borrowers which will come on the same terms and conditions as the original Home Loan. This means that if you are about to complete your Home Loan and see a sudden need for a Personal Loan, you are better off taking a Top Up Home Loan than altogether new debt. Top-Up options are rarely available on Loan Against Property, though some lenders do offer Loan Against Property with a line of credit.
It is always best to talk to the financial experts to get more details about what suits your requirement, a Home Loan or Loan Against Property.
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