Many people must choose between taking out a home loan or a loan against property (LAP) when they need financial help. Both solutions can supply the much-needed money, but they address various demands and have unique advantages and disadvantages. Making an informed choice might be aided by knowing the fundamentals of these two financial instruments. Let’s examine the main distinctions between a Home Loan vs Loan Against Property by real estate, as well as their advantages and disadvantages.
What is a Home Loan?
A home loan is a sum of money borrowed by an individual to fund the purchase of a home that is ready for occupancy or that is still under construction, the renovation of an existing home, or the construction of a home on a piece of land that the borrower already owns. The majority of lenders offer loans up to 80%–90% of the property’s worth. The borrower is responsible for arranging the remaining 10%–20%.
Since the lender retains ownership of the property’s deeds until the loan is fully repaid, it falls under the category of secured loans. As a result, the lender may seize the home and sell it to recoup the money in the event of a default.
What is a Loan Against Property?
Another name for it is LAP. To obtain a loan, you must offer your current self-owned assets as security. The majority of lenders only offer loans up to 65%–75% of the property’s market value. Numerous other criteria, including the lender’s policy, the borrower’s profile and ability to repay, and the type of property, will also affect the ultimate loan amount.
The borrower must give the lender the property deeds under LAP until the loan is repaid, plus interest. The pledged asset may be repossessed and sold by the lender in the event of a default. The LAP is similar to a secured personal loan in that the lender does not impose any limitations on how the loan proceeds are ultimately used. It can be used for anything, such as financing marriage, child education, business expansion, etc.
What are the Tax benefits there to offer?
- Loan Against Property: A salaried individual using this facility may only receive tax deductions under section 24(B) if the loan amount is used to purchase or build a property; otherwise, any other loan that is not permitted for tax deductions, such as marriage, education, travel, or renovation of property pledged as security for the loan, is not eligible. A loan taken out for business reasons may be eligible for tax benefits under section 37(I), such as a tax refund on the interest and the ability to deduct processing and documentation fees as business expenses. Section 80 C does not offer any tax benefits to LAP.
- Home Loan: You can receive tax benefits under section 80 C of this loan plan if you take out the loan for building, home maintenance, or home renewal. You would receive a tax deduction of 1.5 lakhs upon repaying the principal amount. Stamp duty and registration fees may also be included in this, but only up to the authorized payback cap.
Home Loan Vs Loan Against Property Loan to Value Ratio
Before granting a home loan amount, the bank takes into account factors like income, job security, and type of employment. The value of the property you are borrowing against determines how much you will be able to borrow. The highest allowable LTV ratio for a home loan, such as a 30 Lac loan, is 90% of the property’s assessed value. The highest allowable loan-to-value ratio is 80% if your loan balance is greater than Rs. 30 lacs and up to Rs. 75 lacs. However, borrowers can receive financing for up to 60% of the property value through Loan Against Property.
Home Loan Vs Loan Against Property Interest Rates
There are several reasons why home loans and LAP interest rates differ. When opposed to a home loan, LAP often has a higher interest rate. Why is that, then? LAP increases the likelihood of default among borrowers because it provides a variety of flexible funding choices and can be utilized for purposes other than real estate. The bank decides to raise the ROI for this plan as a result. However, because of the nature of the loan, banks view home loans as a more targeted and secure sort of lending. Because of this, their interest rate is probably lower than LAP’s.
Conclusion
It might be difficult to decide between a home loan and a loan against property (LAP) because they both provide financial support but have distinct purposes. Whereas an LAP uses your current property as security for a range of expenses, a home loan is intended only for the purchase, construction, or renovation of a home. Making an informed choice requires knowing the main distinctions between them, such as interest rates, loan-to-value ratios, and tax advantages.