Many borrowers are confused about the difference between a home loan and a loan against property (LAP). While some people are familiar with both of these products, they are completely blank as to which one to choose. To assist both types of borrowers, here are the key differences that you should be aware of while deciding between a home loan and LAP.
- Interest Rate
Home loans and loans against properties come with varied interest rates. Since both the loans are secured by a real estate property, their interest rates are comparatively lower than other loan forms. You have a good possibility of getting a lower interest rate if you apply for LAP using commercial real estate such as a factory, manufacturing unit, or office space.
However, if you put your residential property as collateral to secure LAP, then the home loan and LAP interest rates will be similar, or the home loan rate will be somewhat lower.
- Loan-to-Value or Loan Amount
The maximum loan-to-value ratio (LTV) offered under both products is 75% of the property’s current market price. However, there are certain lenders that offer 90% of LTV up to a certain amount for a home loan. But, due to the stringent qualifying requirements, only a small percentage of people will be authorized for such a large LTV.
LAP has a significant edge over home loans when it comes to borrowing amounts. You can acquire LAP for the maximum amount of Rs 5 crores. Whereas; home loans are available for a maximum of Rs 1 crore.
- Purpose
As the name implies, home loans are offered for the construction, addition, and purchase of the residential property. You can not use this loan for any purpose other than those listed here. However, this is not the case with a loan against property. You can use LAP for any legitimate purpose. You can either use it for your personal expenses or meet your business expenditures.
LAP is often acquired to achieve long-term goals. The majority of borrowers use this loan to pay for the following.
- Most borrowers take this loan to fund their start-up businesses.
- Some apply for this loan to deal with medical uncertainty.
- There are certain businesses that acquire this loan to open new office space or to purchase a heavy plant and machinery.
- Many individuals apply for this loan to purchase or construct a new property.
- Home Loan vs Loan Against Property Eligibility Criteria
The loan against property eligibility standards is less stringent than those for home loans. This is because, in a LAP, the lending institution considers a wide range of properties. Whereas; In a home loan, the lender considers solely residential property. And that too with a slave of terms and restrictions. So, if you want to get approved for funds easily, look for LAP instead of a home loan.
The most popular types of real estate assets that can be mortgaged to get LAP are listed below.
- A residential house or apartment
- Factories
- Manufacturing unit
- Commercial buildings like a shopping mall, office space, hotel, restaurant, school, etc.
- Tax Advantages
A LAP does not offer any direct tax benefits. However, this does not rule out the possibility of gaining an advantage. If you are a business owner and use LAP funds for business objectives, you may be eligible for a tax deduction under section 37(1). The given section allows you to claim a deduction with respect to interest paid towards loan repayment.
Apart from section 37(1), you can also claim deduction under section 24 (B). However, deduction under this section is available to the salaried individuals who are using funds for the purchase of a new house. The maximum deduction under section 24(B) is Rs 2 lakh. LAP does not provide any tax benefits under section 80C.
On the other hand, home loans offer several tax advantages. Under section 80C, you can claim a maximum deduction of Rs 1.5 lakhs with respect to principal repayment. Section 24 allows you to claim a maximum deduction of Rs 2 lakhs towards interest payment. And section 80 EE allows additional tax benefits of Rs 50,000 to first-time homebuyers.
Should I get a home loan or a loan against property to buy a new home?
This is the most regularly asked question by borrowers. A home loan is a great choice if you are solely looking for tax advantages. But if you are looking at the bigger picture, go for a LAP.
Some of the benefits of LAP over home loans are listed below.
- A down payment is not required when purchasing a new home.
- The loan against property eligibility criteria is not stringent.
- The time it takes to process a loan is a bit quicker in a LAP.
- You can acquire a maximum of Rs 15 crores, which will be enough to fund your lavish home.
To Conclude:
Both the above financing products are an example of mortgage loans that is available for a longer tenure. However, a loan against property offers more advantages than a home loan in the long run.