Featured Image Caption: Loan Against Property vs Home Loan
Even though both financial instruments involve mortgaging immovable properties, loan against property and home loans have some fundamental differences. Starting from the purpose of availing these loans to their end-use limitations, the distinctions are sometimes quite direct. Nonetheless, several borrowers fail to conceptualise these differences between the two.
One should assess the differences so that he/she can determine when such credits are necessary. Besides, comparing the purpose, interest rates, loan to value also provides an insight to individuals to choose the right mode of financing option for their requirements.
What are the distinctions between loan against property and a home loan?
Firstly, the primary difference between loan against property and home loan lies in the purpose. Individuals avail these loans for different reasons altogether.
- Purpose of loan – To begin with, individuals avail loan against property by collateralising their immovable property. Moreover, the category of property includes residential and commercial properties. In exchange for that, individuals receive substantial loan amounts corresponding to the market value of their property.
On the other hand, lending agencies issue home loans to individuals who want to finance the purchase or construction of a residential property. Therefore, home loans provide financial assistance to individuals whose savings are not adequate to fund their housing requirements.
- End-use restrictions – Loan on land property have no end-use restrictions whatsoever. This suggests that lending agencies allow individuals to use their loan against property amount in whichever way they deem fit. As a result, individuals resort to this financial instrument to finance several purposes such as education, marriage and vacation. Additionally, individuals also have the opportunity to invest the property loan amount in their businesses. They can thus use loan against property for multiple purposes without any end-use limitations.
Contrarily, individuals can only use their home loan funds to purchase or construct a residential property. With this particular end-use restriction in place, they are unable to channelise the loan finances in any other direction. Thus, home loans fulfil only a singular purpose.
- Loan To Value (LTV) – Despite both these financial tools being secured by immovable properties, there is a difference in their Loan to Value calculator. First, financial institutions provide finances between 60%-90% of the value of the property, in case of LAPs. Thus, individuals receive a percentage of the market value of their residential or commercial property. Higher the value of the property, higher is the LTV percentage. However, individuals also receive higher LTV for a loan against industrial property in case their credit scores are high enough.
As for home loans, individuals receive between 80%-90% of the market value of the residential property that they want to purchase. Even though the LTV for home loans is comparatively greater, its end use-restriction emerges as a limitation.
- Tenor of the loan – In relation to loan against property, the tenor ranges between 2 years and 20 years. As a result, individuals can customise their repayment period by taking into account their financial capability. This feature provides them with the option to service their loans quickly and ultimately reduce the interest component in the EMI.
However, the tenor in case of home loans varies between 20 and 30 years. This gives individuals the opportunity to pay off their home loan conveniently. Moreover, borrowers have the option to foreclose their loans against minimal or zero additional charges.
As can be concluded from the above comparison, the Loan to Value (LTV) for a loan against property is relatively lower than home loans, also to check this loan to value calculator can be considered. However, leading lending agencies in the market provide LAP up to Rs.3.5 crore, which is significantly higher than conventional home loans. To take advantage of these benefits, one should know how to apply for a loan against property as well.
Besides, these agencies also provide pre-approved offers on a vast range of financial instruments. These typically include secured financial tools in the likes of loan against property and home loans. With these offers, individuals can substantially reduce the time and effort required for a successful loan application. You can check your pre-approved offer just by providing your basic details such as your name and contact details.
Knowing the difference between loans against property and home loans thus enables individuals to choose the most suitable financial options. Nonetheless, in both cases, your house or immovable property plays a significant role.
By Alisha Antil
who is a financial advisor and has vast experience in the finance and loans segment.