Often, people tend to get confused between home loan and loan against property. Most people believe both are the same. However, the truth is they are two different financial products. Read on to know more about the differences between home loan and LAP.
When it comes to availing a home loan, most people, especially the first-time borrowers, get confused about the various financial terms associated with it. Most borrowers don’t understand the difference between ‘Loan Against Property’ and ‘Home Loan’ and their features and benefits. Some people use these terms interchangeably. But the truth is that they are entirely different products and their uses, features and benefits are different.
People avail home loans for buying or constructing a new home, which means the ownership of the property does not belong to the applicant at the time of applying for the loan. The LAP, on the other hand, is availed by keeping an existing property as collateral. Listed below are the differences between the two types of loans.
- Interest rate
The interest rate for home loans is comparatively lower than the interest for the loan against property or mortgage loan. One of the main reasons why lenders charge a high interest on LAP is that the chances of default in these cases are high. Although the interest rate for the home loan varies from lender to lender, you can avail a home loan at 8.50% onwards, and the interest rate for LAP ranges between 9% to 11.5%.
- LTV or Loan-to-Value
In India, most lenders offer home loans up to 80% of the property’s value that you wish to buy. For the loan against property, the maximum loan amount you can get is limited to 60% of the value of the asset you keep as collateral. Generally, the lenders appoint an appraiser to evaluate the value of the property before sanctioning the loan.
- Reasons to avail the loan
The home loan can be availed only to buy a ready to move-in home, procuring a land where you wish you to construct a home, and purchasing an under-construction property. With LAP, you can use the amount for both business and personal purposes like business expansion, buying new machinery, paying your child’s university fees, medical expenses, etc. However, you must know that you cannot use the amount for any illegal or speculative activities like investing in the stock market or gambling.
- Duration of loan
While both home loans and loan against property are long-term loans, the tenure for home loans is higher than LAP. You can avail a home loan for 25-30 years, but the maximum duration of LAP is 15 years.
- Tax Benefit
If you have availed a home loan, you can enjoy tax benefits under Section 24 (for the interest component) and Section 80C (for the principal amount) of the Indian Income Tax Act. The tax benefit on LAP varies based on what purpose you use the loan. For instance, if you use the loan amount for business expenses, you get tax deduction under Section 37 (1). And if you use the loan proceeds for a medical emergency or marriage expenses, there are no tax benefits.
- Sanction process
Generally, the sanctioning process for a home loan takes about 15 to 30 days. Also, the documentation process is simple. You must provide your income details and the property-related documents, which usually you can quickly get from the seller/builder. With LAP the sanction process approximately takes 30 to 40 days. This is mainly because the lenders do a thorough check of the personal information, the income details and the security you submit.
Now that you are aware of the LAP and home loan differences make sure that you assess your needs carefully and apply for the right type of loan to get the maximum benefit.