Difference Between Home Loan and Loan Against Property

Owning a home is a dream for many individuals, but it often requires financial assistance in the form of loans. When it comes to financing your home, the most popular option is availing a Home Loan. With a home loan, you can cover up to 80% - 85% of the total cost of the property, provided you’re eligible. 

That said, we’ve seen a lot of queries pertaining to loan against property where many of you have asked us whether loan against property (LAP) is an alternative to home loan. Well, it’s not. Home loans and LAP are entirely two different credit products designed for different purposes.

In this blog, we have aimed to put this debate to rest, once and for all. So, let’s dive in!

Understanding Home Loans

A home loan is a secured loan specifically designed for purchasing a house or property. Most banks offer loans up to 80% - 85% (based on your eligibility) of the cost of the property. The loan tenure, usually, is up to 20 years. The interest rate is comparatively lower than personal loans. However, home loans come with end-use restrictions – meaning, you can use the loan amount only to buy a house or property and not for anything else. Your house acts as a collateral till the loan is repaid. Some of the key features of home loans are:

1. Loan Amount: Home loans typically cover up to 80% of the property's value. The loan amount is finalised based on various factors such as income, credit score, and repayment capacity, among others.
2. Repayment Tenure: Home loans offer long repayment tenures that can extend up to 20 years. 
3. Interest Rates: The interest rates on home loans can be either fixed or floating. Fixed interest rates do not change during the tenure, while floating interest rates can change based on RBI’s or the bank’s policies. 
4. Tax Benefits: One of the major advantages of home loans is the tax benefits they offer. Under Section 24(b), Section 80(C), Section 80EE and Section 80EEA of the Income Tax Act, borrowers can claim deductions on both the principal amount repaid and the interest paid on the loan, subject to terms and conditions.

What is Loan Against Property (LAP)?

A loan against property, also known as a mortgage loan, is a type of secured loan that allows you to avail funds against your existing property. The property acts as collateral for the loan, thereby reducing the risk for the lender. So, what’s the difference between LAP and a home loan? The primary difference being unlike home loans, LAP doesn’t come with end-use restrictions. You can use the loan amount to meet any other financial requirements like funds for medical emergency, wedding, business expansion, etc.

Here are some key features of a loan against property:

1. Loan Amount: The loan amount is determined by the market value of the concerned property. Typically, banks offer up to 70% of the property's value as a loan.
2. Repayment Tenure: Similar to home loans, loans against property also come with extended repayment tenures up to 15 years. 
3. Interest Rates: The interest rates on loans against property are generally lower compared to unsecured personal loans since these loans are backed by collateral.
4. Utilisation of Funds: Unlike home loans that can only be used for purchasing or constructing a residential property, loans against property provide borrowers with more flexibility in terms of fund utilisation. You can use these funds for various purposes like business expansion, education expenses, medical emergencies, etc.

Home Loan vs Loan Against Property (LAP): A Quick comparison