These days’ home loans are the most favourable options for home buyers who are looking to buy their dream home. However, loan against property is another term in the financial landscape which at times confuses many loan borrowers. On the other hand, both the terms have altogether different meaning as well as various benefits. Scroll down below to understand the differences in detail:
What is a Home Loan and Loan against Property?
A home loan is basically a secure loan that home buyers take to purchase their dream home whether under-constructed or Ready-to-move-in. On the other hand, loan against property (LAP) means loan against any self-owned existing residential or commercial property. It is given as depending on the market value of the property may be 40 or 60%.
While a home loan is taken to purchase a property only, Loan against Property can be taken for several purposes like business expansion, wedding, higher studies, travel, and medical treatment or sometimes to buy another property too.
For Home loan, a borrower has to qualify certain eligibility limits set by banks and financial institutions. These include age, annual income, type and status of employment, credit score, EMI payment capacity etc.
On the other hand, for Loan against property, the criteria differ from banks to banks. Some of the common factors among all include your income, total savings, other debts, and cost of the property, repayment history of other loans or credit cards.
Rate of Interest and Loan Tenure
Both home loan and loan against property comes with an interest rate, but it is lower in case of a home loan. The interest rate in case of Home loan generally starts with 9% and goes till 12%, on the other hand, in case of loan against property it varies from 12 to 15%.
Talking about tenure, for a home loan it is basically 30 years. The tenure of loan for borrowers in case of loan against property is 15 years.
Margin money is that amount which a bank does not include in the loan amount. It has to be given by the borrower during property purchase. In India, RBI (Reserve Bank of India) regulates the loan amount and the margin amount.
In case of Home loan, banks pass a maximum loan of 85 or 90%; rest 10 or 15% has to be given by the borrower. However, in loan against property, banks keep very high margin rates which vary from 25-50% of the property.
Income Tax Benefits
In case of home loan, an individual can enjoy twin income tax benefits. The first one is on the repayment of the principal amount, available under section 80 (C), up to Rs 1.50 lakh on all the residential properties. This deduction is available along with various other items like contribution towards employee provident fund, NSC, Children school fee, PPF, ELSS, ULIP etc. The second benefit can be availed under Section 24(b) on the interest paid on home loans. This benefit is availed on both residential and commercial properties.
On the other hand, in case of loan against property, tax benefits differ from purpose to purpose.
- If the loan is taken for business expansion, the tax benefit can be claimed under section Section 37(1) on the processing fees and documentation charges, incidental costs etc.
- If the loan is taken for wedding or higher education, then interest cannot be claimed.
- If the loan is taken for purchasing other property, then the tax benefit can be claimed under Section 24(b). Remember, you cannot claim benefit on principal amount just like a home loan.