In India, the financial organisations, including HFCs (Housing Finance Companies) and NBFCs (Non-banking Financial Companies), offer a variety of home loan offers to suit the different needs of the people. Today, you can avail of a home loan to purchase a new ready-to-move flat or construct your own home. Also, you can use your existing home as a collateral to avail loan against property.
However, many first-time borrowers do not understand the difference between home loan and loan against property or LAP and tend to use the terms interchangeably. The truth is home loan and LAP are entirely different financial products that serve different purposes. So, if you are looking for the best home loan in India, you must be aware of the key differences between LAP and home loan to make the right choice.
Home loan and loan against property serve specific purposes. You can avail of a home loan only for buying a new home from the builder or a government body. You can also use it for buying a resale flat, constructing a home on the piece of land you own or for home renovation and extension purposes.
On the other hand, the LAP gives you the flexibility to use the amount for any purpose you want; the lenders do not have any restrictions. You can use the loan for paying child’s school/college fees, increasing business capital, buying new machinery, taking a world tour, etc.
Loan tenure is one of the most critical factors you must consider as it has a direct impact on the EMI amount. If you are on a tight budget and cannot afford repaying a high amount every month, it is better to choose a longer loan period.
For home loans, the financial organisations offer a maximum repayment tenure for 30 years. However, depending on your financial condition and repayment capacity, you can choose the loan period as you want.
For LAP, the maximum repayment tenure you get is 15 years.
Loan to value ratio or LTV
The loan to value ratio refers to the maximum amount the financial organisations lend based on the property’s value.
For home loans, the maximum LTV is 80%. This means when you apply for a home loan, lenders do not sanction the full property’s value as loan. You must pay at least 20% of the amount from your pocket. This is called down payment.
In contrast, the loan against property has a lesser LTV. The maximum amount you get depends on the type of property you mortgage. Generally, the maximum amount you can get is 50%-60% of the property’s value.
Probably one of the most important differences between home loan and LAP that would matter to you is the rate of interest levied by the lenders on the amount you borrow.
The home loan interest rates are lower than LAP. You can get a home loan starting from 6.70% per annum. Additionally, you can get an interest subsidy on home loan interest rate under the PMAY scheme, if you qualify for it.
The mortgage loan interest rate is slightly higher than home loans. The interest rate levied would greatly depend on whether you mortgage a residential or commercial property. Generally, the lenders offer LAP at a lower interest rate for commercial properties.
Now that you are aware of the differences between LAP and home loan, know your exact needs and choose the right loan type.