Find the terminology of loan taken against property and home loan confusing? No big surprise, since the two financial tools, sound similar and are related to real estate. They are, in fact, quite different. Read on to know more.
People often tend to get confused between the functionalities of home loans and loans acquired against property (mortgage loans). While both are high-value financial instruments that can be utilised to cover huge expenditures, they are, nonetheless, completely different from each other. Let’s throw some light on the basic features of the two funding concepts and how they vary.
What is a Home Loan?
A home loan is secured specifically for buying a house by paying a small down payment and reimbursing the borrowed amount in monthly instalments over the selected tenure.
What is a Mortgage Loan?
It is an open-ended loan processed against an existing property that is free from any litigations. The property (residential/commercial/self-occupied/rented) is used as collateral to draw funds against it from the lender. While the custody of the property lies with the lender until the loan is paid off, the borrower can use and retain the ownership of it. The mortgaged security, however, can be confiscated by the lender in case of not being able to pay instalments in time.
Now that we know the basics of both the types of loan, let us look at some crucial factors that can help you in differentiating between both the loan products.
- Purpose of the Loans: A home loan is sanctioned specifically to buy a property. It could be for a readymade apartment, an under-construction house or a plot to build upon. A loan secured against property is multi-purpose. The borrower can utilise the money disbursed for an array of monetary needs such as expanding the business, planning a dream wedding, medical emergency, funding a child’s higher education, etc. It must be noted that a mortgage loan cannot be used for stock market investment, gambling, risky business, etc.
- Rate of Interest: The interest rate (fixed or floating) levied against property is steeper compared to regular home loans. This may be to counter the risk of default, which is higher in the former. Currently, the interest charged on a mortgage loan is between 10-15% while that on the home loan is in the range of 8.5 -12%. The rate of interest is variable and depends on the lender’s internal policies and the credit profile of the borrower.
- Margin Payment & Quantum of Loan: While the quantum of loan sanctioned can vary from bank to bank, both loans require a margin payment from the customer. This is a safety net against a drop in the market value of the property. Funding for home loans that fall under the priority sector lending can go up to as much as 90% of the total value of the property. The pay-out for a mortgage loan is usually around 60% of the assets market value.
- Tenure of the Loan: Home loans can be availed for anywhere between 20-30 years depending on the age and eligibility of the applicant. For mortgage loans, most banks and NBFCs provide a maximum tenure of up to 15 years based on the credit profile of the borrower, condition of the property, the amount of loan, etc.
In a nutshell, both home loans and loan against property (LAP) are related to real estate. The former helps in buying property, whereas the latter uses an existing property to procure funds. Both financial tools have their own set of pros and cons. The key is to be clear about the end-use. A home loan is an ideal solution for homeownership while LAP can be an excellent option to fight a cash crunch, be it for personal, business or commercial usage.