Home Loan vs Loan Against Property: Key Differences

Home loans and loans against property are types of loans that often confuse borrowers. While they may sound similar, these are two distinct loans. While home loans are secured loans obtained by individuals to purchase a residential property, a loan against property is a multi-purpose loan that individuals secure using the real estate they own as collateral. Both loans could suit different purposes and have different advantages and properties. Read on to learn more about home loan vs loan against property.

Understanding Home Loans

A home loan is an amount borrowed from a financial institution, such as a housing finance company, to purchase a new or resale home, build a home, or renovate or extend an existing one. Most home loans allow financing up to 80%–90% of the house's market price. The lender will keep the house until you have fully repaid the loan. However, there are some eligibility criteria that you should meet.

Home loan eligibility criteria

Eligibility criteria for home loans may vary across different lenders. But below are the most common terms.

• The applicant's age is a major factor in determining home loan eligibility. Salaried individuals have an age limit of 21 to 65 years. The age range for self-employed individuals is 21 to 65 years.

• Minimum salary: Rs.10,000 per month.

• Minimum business income: Rs. 2 lakh per year.

• Maximum loan term: 30 years.

• The applicant's current and future income significantly impact the loan amount.

• A clean repayment history is considered positive.

• Other financial obligations include existing liabilities such as a car loan or credit card debt.

Types of home loans 

Home loans are categorized based on the interest rate structure.

• Fixed-rate home loans have a set interest rate for the entire loan term, providing stability in monthly payments. 

• Floating-rate or adjustable-rate home loans (ARMs) have interest rates that fluctuate periodically based on market conditions, resulting in varying monthly payments. 

• Hybrid loans combine features of both, offering an initial fixed-rate period followed by a floating rate. 

Each option has advantages and disadvantages, so borrowers should carefully evaluate their financial situation, future plans, and risk tolerance when choosing a home loan.

Now, let us understand loan against property in detail to compare home loan vs loan against property better.

Understanding Loan Against Property (LAP)

A loan against property (LAP) is a secured loan against an asset presented as collateral. This asset could be owned land, a residence, or any other commercial property. The asset remains collateral with the lender until the entire loan against the property is repaid.

LAP Eligibility criteria 

Similar to home loans, eligibility criteria for LAPs could vary between lenders. But below are some common norms.

Loan Against Property Eligibility for Salaried Individuals

• Their age should be at least 21 years or above at the time of loan application but under 65 years at the time of loan retirement.

• Their proof of income is above Rs. 1.8 LPA.

• They also need to furnish profits of the past two years of business and a record of at least three years of business.

Loan Against Property Eligibility for Self-Employed Individuals

• Applicants should have an income above Rs. 40,000 per month and must be working for the past 2-3 years.

• The applicant should be at least 18 years or above at the time of application but under 60 years at loan retirement.

• Sanction of the loan is at the discretion of the bank.

Types of LAP

LAP can be categorized based on the type of property used as collateral.

• Residential LAP is secured against residential properties such as houses, flats, or apartments. 

• Commercial LAP is secured against commercial properties like office spaces, shops, or industrial units. 

• Rental income-based LAP is designed for individuals who earn rental income from their properties, where the loan amount is determined based on the rental yield. 

Each type has its own eligibility criteria, interest rates, and loan-to-value ratios. Borrowers should carefully evaluate their requirements and property type before opting for a specific LAP variant to ensure a suitable financing solution.

Home Loan vs Loan Against Property - Major Differences

Home Loans are purpose-specific for purchasing/constructing a residential property, while LAP provides end-user flexibility. Below are the major differences between home loan vs loan against property.

Parameter

Home Loan

Loan Against Property (LAP)

Loan Purpose

Specifically for the purchase/construction of a residential property

It can be used for any purpose except speculative investments

Loan Amount & Tenure

- Loan amount up to 90% of property value - Tenure up to 30 years

- Loan amount 55-70% of property value - Tenure up to 20 years

Interest Rates

Generally, lower interest rates

Higher interest rates compared to home loans

Tax Benefits

- Principal repayment up to Rs. 1.5 lakh exempted under Section 80C - Interest paid on home loan exempted under Section 24(b)

No specific tax benefits unless used for permitted purposes (e.g., interest exemption under Section 24(b) if used for rental property)

Risk of Property Loss

Property purchased using the home loan is at risk in case of default

Residential property used as collateral is at risk in case of default

FAQs

Can I use a home loan for purposes other than buying a house?

No, home loans are specifically designed to purchase or construct a residential property. If you require funds for purposes other than acquiring a home, you should consider alternative options like a personal loan or a loan against property (LAP)

Is the entire property value financed by the lender in a loan against property?

No, lenders typically finance only a portion of the property's value in a loan against property. The loan-to-value (LTV) ratio is the maximum amount that can be borrowed against the property's market value.

Conclusion - Home Loan vs Loan Against Property

Borrowers should carefully assess their requirements, eligibility criteria, and risk appetite to determine the most suitable option between a home loan and a loan against property. Explore Aadhar Housing's wide range of home loan solutions and loan against property offerings to seamlessly fulfill your housing and financial needs.