Difference between a Loan Against Property and a Home Loan explained
Comparing Home Loans and Loans Against Property: A Comprehensive Guide
When it comes to securing a loan using your property as collateral, there are two popular options: Home Loans and Loans Against Property (LAP). Here's a breakdown of the key differences between these two types of property-backed loans.
Interest Rates
Home Loans typically boast lower interest rates, thanks to government support, and offer both fixed and floating options. In contrast, LAPs have slightly higher interest rates than home loans but are still lower than other unsecured loans. As of now, the interest rate for a Home Loan stands at 8.75% p.a., while a Loan Against Property has an interest rate of 9.15% p.a.
Usage
Home Loans are designed specifically for purchasing or constructing a residential property. On the other hand, LAPs can be used for a variety of purposes, such as business expansion, education, medical emergencies, or any other personal use.
Tenure
The tenure for a Home Loan can range between 15-30 years, depending on the lender, while the tenure for a Loan Against Property is a maximum of 15 years.
Tax Benefits
Home Loans offer significant tax benefits. Principal repayment and interest payments qualify for tax deductions under Sections 80C and 24(b) of the Income Tax Act, making it a tax-efficient choice. In comparison, LAPs offer limited tax benefits. Interest can be claimed as a business expense under Section 37(1) only if used for business purposes, and there are no tax benefits for personal use.
Loan-to-Value (LTV) Ratio
Home Loans often have a higher LTV, generally up to 80-90% of the property value, while LAPs usually have a lower LTV, typically around 60% of the property’s value to mitigate lender risk.
Foreclosure and Property Rights
Both Home Loans and LAPs are secured by property, meaning non-repayment can lead to foreclosure or the transfer of property rights to the lender. For a Home Loan, the lender remains the owner of the property until the entire payment is made, and once the final payment is made, the ownership is formally transferred back to the borrower. For a Loan Against Property, if the borrower defaults, the lender can take over the property to recover the money.
Flexibility and Purpose
Home Loans are focused on housing finance, supporting homeownership, and the funds can only be used for buying a house or plot. In contrast, LAPs, also known as mortgage loans, offer more flexibility, as the funds can be used for multiple purposes, including personal needs and business expansion.
This comparison highlights the distinct purposes, cost structures, and benefits available to borrowers choosing between these two types of property-backed loans. When deciding which loan is best for you, consider your financial needs, the purpose of the loan, and the tax implications.
When making a decision between Home Loans and Loans Against Property (LAP), it's crucial to consider the interest rates as Home Loans often have lower rates, while LAPs have slightly higher rates but are still lower than unsecured loans. Additionally, the purpose of the loan plays a significant role in the choice, as Home Loans are designed for housing finance, while LAPs can be used for various purposes such as business expansion or personal needs.
