A home loan and a loan against property sound conspicuously similar with many borrowers using the two terms interchangeably. But as part of secured advances, banks and financial institutions treat the two as different credit options.
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While aspects like credit score and repayment history matter in both cases, CNBC-TV18.com spoke to Jairam Sridharan, MD at Piramal Finance to find out how the two differ from each other.
Basic definition
A home loan or housing loan, as the name suggests, is the kind of loan that consumers avail when they want to purchase a house and need some credit for the same. On the other hand, a loan against property or mortgage loan is credit that a borrower gets from a lender against any loan-free property that they already own, Sridharan said.
Purpose
A home loan allows a borrower to use the credit to buy an under-construction, pre-constructed, apartment, or even a plot or piece of land for building a house.
A loan against property lets borrowers raise a credit line for not just buying a property or a house, but also for any other purpose.
"The house that one eventually buys with a home loan can be used for self-occupation or can also be rented out as per a borrower’s needs. The pre-owned property that one mortgage for loan against property can be an office, a shop, industry or factory-related property, or even a piece of land in some cases," Sridharan said.
Instead of opting for a personal loan, a loan against property can be a less expensive option for securing credit, Sridharan said.
"LAP is often used by business owners to get access to capital to invest in their business for expansion and growth. Among salaried individuals, if you own a flat or other property, LAP could be a cheaper way to fund marriages, higher education for kids etc, instead of taking a more expensive personal loan."
Security/Collateral
When availing of a home loan, the house that one intends to purchase via this loan is often used as collateral or security. In this case, there’s a slight overlap between a home loan and a loan against property, since both use the borrower’s property as collateral.
However, in the case of collateral for loan against property, one can only use property they already own, and not the property they intend to buy, Sridharan clarified.
Interest rates
At present, home loans or housing loans are available at a lower rate of interest due to the government’s big push for affordable housing. Loans against property or mortgage loans usually have a slightly higher rate of interest than home loans.
Loan-to-value ratio
Borrowers can get a credit of up to 90 percent of the value of the property in case of a home loan. On the other hand, the maximum loan amount sanctioned in case of a loan against property is 60 percent of the property value, after the evaluation of the property by the lender.
(Edited by : Ajay Vaishnav)
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