Do you want to buy a ready- to- move-in house? You could also seek to buy a house in the construction process. Or maybe, you have a piece of land and are planning to establish a home there. If any of the above desires is true, you get a home loan to accomplish the purpose.
You are required to repay the loan you get through monthly installments. When signing up for the loan, you can choose between floating or fixed interest rates. Remember, when you take a home loan, your lender continues to own the home until you repay the loan.
If you have a home and need cash, you can use your property as collateral to get a loan. Your home is valued, and you submit property documents to the lender until you repay the loan.
When your loan against the property is approved, you pay EMI to cater for the principal and interest rate. However, a property loan interest rate is higher than a home loan.
Key Differences between a Home Loan and Loan against Property
Interest Rate Differences
When taking a loan, you should consider the interest rate first. Your goal should be to get a loan at an affordable interest rate and save the cost of borrowing. Saving a small percentage of payable interest impacts your budget at the end of the loan repayment period.
Credit score, income, and collateral affect mortgage loan interest rates. However, you’ll pay higher interest rates for a loan against the property than for a home loan. Lenders view a loan against property as riskier in terms of defaulting than a home loan.
Therefore, many financial service providers charge higher interest for a loan against property.
Differences in Loan Purpose or Usage
A home loan has usage limits. You will be allowed to use a home loan to build, buy a ready-to-move-in house or purchase a house under construction. Your lender won’t allow you to use the money you borrow outside those purposes.
On the other, a loan against property has no limits on usage. Once your loan is disbursed, you are free to use the money to expand your business. You can spend the loan against property on other personal needs.
Make sure you use the money you receive for something constructive. Remember, you will have to repay the loan, and spending it prudently helps you to repay without stress. Failure to repay your loan, the lender has the right to sell your property to recover the loan.
Loan Tenure Differences
Home loans come with longer repayment periods than loans against property. You can take a home loan with a 20 to 30 years repayment period.
On the other hand, many lenders will give you a loan against property with a maximum of 15 years of tenure.
Loan Amount Differences
When you sign-up for a home loan, you will get a larger amount than a loan against property. Buying a home or establishing a new one is expensive. You require a huge amount to accomplish your goal. So, many lenders will finance up to 90% of the property cost.
On the other hand, loans against property range from 60-70% of your property value.
Top-up Options
You will have limited top-up options when it comes to a home loan. Though some lenders will allow you to up your home loan, you need to undergo further assessment.
Most loans against property come with a top-up option. That means you can access more funding on the running loan.
Summing It Up
Get to know the differences between a loan against property and a home loan before you apply. That way, you will understand which type of loan suits you best based on your needs. The two types of loans differ in interest rates, loan amount a lender can give, and the repayment period. Tax exemptions are another significant difference between the two. A home loan comes with tax deductions, while a loan against property does not.
