Home Loan vs. Loan against Property: The Crucial Differences

Have you ever gone through the drop-down menu of various kinds of loans available on the portal of a financial institution? You may find the usual suspects such as personal loan, auto loan, education loan, home loan etc. But look closer, and you will also find something called loan against property.

What’s loan against property, you may ask? And how is it different from the home loan?

We find out.

Purpose of the loan

Home loans and loan against property may sound the same, but they serve different purposes. The home loan is meant for acquisition/construction of a house.

The loan against property means that you take a loan against an existing property.

Home loans can be used only for the purpose that it is meant for, i.e., buying a home. The loan against property can be used for a variety of purposes like business expansion, education, meeting emergencies or even for buying a house. It can be availed as a lump sum amount or as a line of credit for a specified period.

The rate of interest

Home loans fall under the category of priority lending where the rate of interest is lesser. Currently, home loan interest rates are decided by the Marginal Cost of Funds-based Lending Rate (MCLR) and are in the range of 8.5-12% depending on the lender and the credit profile of the borrower.

Compared to this, the loan against property does not fall under any such category, hence the interest rate is higher and ranges between 10-15%.

Loan to value

To avail a home loan, a borrower needs to pay the margin money, which is also called the down payment. This is in the range of 10-30% depending on the bank and the credit profile of the borrower. However, as the loan against property is considered as a high ticket loan, the loan to value ratio is much lesser than that of a home loan. In case of loan against property, lenders retain a higher margin in the range of 25-40%.

Tenure of the loan

Both home loans, as well as loans against property, are long tenure loans. The maximum tenure for home loans can be 30 years, which again depends on your lender. But the maximum tenure for a loan against property is much lesser at 15 years.