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    Crucial Difference Between Home Loan & Loan Against Property

    8448389600, Fintech Advisor
    Jan 1, 1970 12:00 AM 5 min read

    People sometimes need to borrow money or opt for taking a loan to gather funds for buying a new house or for financing their business or start-up or any other important purpose. However, one has to look through every aspect before opting for a loan. There are various factors required to be examined, like types of loans offered, schemes, benefits, interest rates, etc.

     

    What is the major difference between a home loan and loan against property?

     

    A home loan is taken to purchase a property that doesn’t belong to the borrower, and a loan against property is taken by keeping an already owned property as an asset.

     

    The question that arises when you need to borrow money is that should you go for a loan against property or a home loan?

     

    A home loan can only be taken for the construction or purchase of a house while a loan against property can be taken for both business or personal use.

     

    Why is a loan against property or a home loan is taken?

    A home loan is taken for buying a house, which is:

     

    • Either ready to move into right away

    or

    • To book a property under construction.

     

    It is available for both commercial as well as residential properties.

     

    Loan against property, on the other hand, can be taken for

    • Either funding one’s business

    or

    • For personal use like education, marriage, or other purposes.
    • It can also be taken to buy another property if your home loan doesn’t get approved or is it not possible to get one due to any technical reason.

     

    Loan against property is borrowed against the security of property which belongs to you and is immovable. It can be a residential or commercial property.

     

    Tax benefits of home loans and loan against property:

    If you are buying a residential house with the help of a home loan, you can claim twin tax benefits based on the laws of income tax.

     

    • The first benefit is up to Rs 1.50 lakhs for all the residential properties that are taken together for the repayment of the major component of the home loan. This benefit is available under section 80 C.

     

    And along with other items like provident fund, contribution to employee provident fund, life insurance premium, school fee for children, national saving certificate, etc. this deduction of rupees 1.50 lakhs is available.

     

    • Under section 24b there is a similar benefit for interest paid on such loans that can be availed (even for commercial properties) and the amount of money you borrowed from the people you know.

     

    For a loan against property, the tax benefits depend on the use of money that you borrowed.

     

    • You can claim the interest paid and the incidental costs as business expenditure under section 37 (1) if you use the money for business purposes.

     

    • If you opt for a loan against property for personal purposes like marriage or education, you cannot get the same benefit as per the tax laws.

     

    • But, if you use it for buying another residential property, then you can claim your interest paid and incidental costs under section 24 (b) of the income tax laws.

     

    Both home loan and loan against property have their own tax benefits and helps the borrower lessen his/her repayment burden.

     

    Margin requirements and interest rates for home loans and loan against property:

     

    Lenders have a fear that the market value of the security given to the lenders against the loan taken can decrease anytime so to avoid taking any risk the lenders do not provide the borrowers with the full value of the security. This difference set by the lender is called the margin. For home loans in the case of other banks or finance companies, The Reserve Bank of India sets the margin. The amount of home loan you borrow will decide your margin money.

     

    You can get a loan up to 90% of the value of the property you provide as security while you contribute the remaining 10 percent yourself. The margin requirements can increase up to 25 percent depending on the amount of home loan availed.

     

    Whereas, in case of loan against property, you can avail loan up to 75% of the property's value, which also depends upon the type of property.

     

    The interest rate on home loan ranges from 9 to 12% depending on the credit score and other factors of the borrower’s credit history and even on the type of lender.

    And for a loan against property, the interest rate is higher and varies from 11 to 14 percent.

     

    If you go through the difference between both the types of loans, you will realize that opting for a home loan is a much better option than going for a loan against property. Home loans come with lower interest rates, more benefits, and even more tenure. You can go through the types of home loans available and choose the one according to your affordability and flexibility. And then, you can easily work on your documentation and other required aspects to get one approved.

     

    So why go for a loan against a property when you can avail of better benefits by taking a home loan?

     

    You should opt for a loan against property only if there is any title defect in the property you want to buy otherwise taking a home loan is the best option amongst all for purchasing any house whether residential, commercial, under construction or ready to move in.