Despite the fact that a home loan and a loan against property are two different types of loans, the terms used to describe them can occasionally lead to misunderstandings. What distinguishes a home loan from a loan against property, both of which are secured by real estate?
We are prepared to assist. We give you all the details you require to comprehend the differences between home loans and loans against property.
Purpose of loans
A loan against property is used to finance an existing property, whereas a home loan is used to finance a home you intend to buy, build, or purchase a piece of land. In other words, the property is used as collateral for the loan that the borrower takes out.
A home loan is intended exclusively and specifically for the acquisition of new real estate. The loan against the property’s ultimate goal, however, is unclear. It can be utilized for a multitude of purposes, much like a personal loan, including starting or expanding a business, funding schooling, paying for unforeseen medical expenses, financing a wedding, etc.
Both commercial and residential properties may be financed with a loan against property. Real estate can be used as security for a one-time loan or even as a line of credit with a set time limit.
Rate of interest
Home loans fall under priority sector finance; as secured loans backed by real estate, they have interest rates that can range from 8.5 to 12%, depending on the lenders and the borrower’s credit history. Mortgages are based on a lending rate that includes a margin for the cost of funds (MCLR).
However, due to the open-ended nature of the loan, a loan against property is not regarded as a priority sector. The interest rate levied is consequently greater than for residential loans. Currently, the interest rate is between 10 and 15 percent, depending on the lenders, the property being mortgaged, and the credit history.
However, the interest rate on a loan against property is lower than the interest rate on an unsecured loan like a personal loan.
Tenure of the loan
Home loans and loans against property both have extended terms.
Lenders now provide home loans with terms up to 30 years long. But loans against property are not permitted for such lengthy terms. The maximum loan term available is 15 years, however, this can change depending on a number of criteria, including the borrower’s credit history, the age, and condition of the property up for a mortgage, the amount of the loan being taken out, etc.
Loan to value ratio
Every loan has a margin payment requirement from the borrower’s side as a demonstration of their commitment to the loan. The same applies to both home loans and loans against property. Both call for a specific margin payment. The margin amount also shields the lenders from a decline in the property’s market value.
The minimum proportion of margin money that must be obtained from the borrower in the case of house loans is outlined in RBI regulations for bankers. The maximum percentage of the loan amount that is permitted is 90%, thus the borrower will be required to provide the remaining 10%. For large-ticket loans or when it comes to those with low credit scores, this amount could be increased to as much as 25%.
The margin criteria for housing finance companies are outlined similarly by National Housing Bank, and they are nearly identical to those outlined by RBI.
The margin requirement is larger for loans against property nevertheless, as this type of lending is not considered to be in the priority sector. Therefore, the required margin may be between 24 and 40 percent of the property’s worth.
Documentation involved and ease of approval
Since both loans are based on real estate or other immovable property, there is clearly a significant amount of documentation required. In contrast, a home loan has a shorter approval procedure and involves fewer paperwork, particularly when purchasing from a reputable developer or if the project has already been approved.
However, depending on the type of property being mortgaged, the number of documents needed when applying for a loan against property may be significantly higher. The title to the property and any encumbrances, if any, will need to be thoroughly investigated by the lender. If the property is owned jointly, all of the owners must agree. There may be future disagreements if the property was inherited or left in a will. The approval procedure for a loan against property may take longer than a home loan because several legal difficulties may be involved.
When you need a large loan and want to pay less interest than a personal loan, a loan against property might be a smart choice. You must, however, keep in mind that you risk losing your possessions if you are unable to repay the loan on time.