Many first-time home loan borrowers don’t understand the difference between loan against property and home loan. These are completely different financial products and serve different purposes. Read on to know more about the differences between the two.
When it comes to applying for a home loan, you will invariably come across several jargons. So much so that, you may be left thinking how is home loan different from loan against property or LAP. To add to the confusion, many people use the terms interchangeably. But, you must know that home loan and LAP are completely different financial products and they serve different purposes.
Before we delve into the difference between these two loans, let us first understand what exactly they mean.
What is a home loan?
In simple terms, a home loan is a financial instrument that allows you to purchase a ready-to-move or an under construction flat. You can also avail a home loan to construct an apartment on a piece of land that you own. So, in a nutshell, home loan is a credit that you can avail from any financial institution to buy or construct a home.
What is a loan against property?
The loan against property, which is also commonly referred to as mortgage loan is a financial instrument wherein you can avail a credit by pledging a commercial or residential property. It is a secured loan, and the lender determines the maximum amount you can borrow based on the property’s value you pledge.
A significant factor that distinguishes loan against property from home loan is that you can use the amount borrowed for any purpose you want. You can use it to expand your business, meet children marriage/education expenses, purchase new business equipment, etc. The lender has no restriction on the end usage of the amount.
Home loan vs Loan against property
The differences between home loan and LAP can be drawn on the following factors –
- Loan to value or LTV ratio
LTV ratio is the percentage of the loan amount you can borrow against the value of the property. Remember, a home loan is specifically meant to help you purchase a new or an under-construction home. Therefore, the lenders typically sanction a maximum of 80% of the property’s value as loan.
On the other hand, when you apply for a LAP, you already own the property that you wish to pledge against the loan. And, most lenders in India approve a maximum of 50% of the property’s value as LAP.
- Interest rate
When you apply for any type of loan, the interest rate is an important factor to consider as it has a direct impact on the affordability and repayment.
Many lenders believe that the chances of default by the borrower on repayment of LAP, such loans are subject to a comparatively higher interest rate than home loan. However, since loan against property is a secured loan, the interest rate is much more affordable than other unsecured credit options like personal loan or loan against credit loan.
The home loans are available at a competitive price thanks to the immense competition among the lenders. Additionally, with the introduction of the various government housing schemes, the home loan interest rates are capped to make the loan affordable for citizens. Today, you can avail a home loan starting from 6.70%.
- Loan tenure
Since home loans are high value loans, they come with flexible repayment tenure. Depending on your repayment capacity you can avail the credit for 15-30 years.
On the other hand, you can avail LAP for a maximum duration of 15 years.
Now that you are aware of the difference between home loan and LAP, make sure that you apply for the right type of loan to meet your specific needs.