Difference Between Home Loan And Loan Against Property
When it’s time to borrow a large amount of money – to purchase your dream house, to pay for your child’s education, or to purchase that investment property to expand your business – that’s when secured loans come into play.
Among secured lending options, home loans and loans against property (LAP) are widely availed, but they cater to distinctly different financial needs.
In this blog, we’ll explain the difference between a home loan and a loan against property in the simplest terms.
First time borrowers or those looking to leverage the value of their property should know the differences and nitty-gritty details of each type of loan to make the best financial decision. Let’s get started.
Why Understanding the Difference Matters for Borrowers
Picking the wrong loan can cause unnecessary stress, cost you more in interest payments, or, worse, risk losing valuable assets.
When you’re purchasing a new home or releasing value from an existing home, understanding the difference between home loan and loan against property will help ensure you select a product that fits your:
• Goal
• Risk appetite
• Possibility of repayment
What is a Home Loan?
A home loan is a secured loan for acquiring a house or property, often giving up to 80%-85% of the property’s value, with a 20-year loan term and lower interest rates than personal loans.
However, these loans come with end-use restrictions and require the home to be kept as collateral until the loan is fully repaid.
Features of home loan
1. Loan Amount: In most cases, home loans fund up to 80% of the property’s assessed market value. The loan amount is determined by a variety of criteria, including income, credit score, and repayment capacity.
2. Repayment Tenure: Home loans have extended payback terms of up to 20 years.
3. Interest Rates: Home loan interest rates might be fixed or variable. Fixed interest rates are constant during the duration, but floating interest rates might fluctuate due to RBI or bank policy.
4. Tax Benefits: Home loans offer considerable tax advantages, allowing borrowers to deduct both principal and interest, subject to Income Tax Act requirements.
Eligibility Criteria
To apply for home loan, you need to meet specific criteria:
• You must have a steady income (salaried or self-employed)
• Good credit score (it must be above 750+)
• Age (typically 21–65 years)
• Clean repayment history
Documents Required
• KYC documents (ID & address proof)
• Income proof (salary slips, IT returns)
• Bank statements
• Property documents (sale agreement, title deed)
What is a Loan Against Property (LAP)?
A loan against property, sometimes called a mortgage loan, is a type of secured loan that lets you borrow money against your current property. The property serves as security for the loan, lowering the risk for the lender.
Features of loan against property
1. Loan Amount: The sanctioned loan amount depends on the appraised market value of the pledged property. Banks often issue loans for up to 70% of the property’s value.
2. Repayment Tenure: LAPs have longer payback terms of up to 15–20 years.
3. Interest Rates: Because LAPs are collateralized, interest rates are often lower than those on unsecured personal loans.
4. Fund Utilization: Unlike house loans, loans secured by real estate provide borrowers more freedom to spend the money for a range of reasons, including company development, educational costs, and unexpected medical needs.
Also read: Do’s and Don’ts of Loan Against Property
Eligibility Criteria
• Ownership of a fully constructed, legally clear property
• Steady income source
• Property valuation and title clarity
Documents Required
• Title deed of the property
• Income documents
• KYC documents
• Property tax receipts and encumbrance certificate
Also read: Benefits of Taking a Loan Against Property in Mumbai
Major Differences Between Home Loan and Property Loan
Here’s a category-wise breakdown to help you clearly understand how a home loan and a loan against property differ.
1. Purpose of Loan
• Home Loan: For buying, building, or renovating a house
• LAP: Ideal for funding personal goals or business requirements—not meant for home purchase.
2. Type of Property Involved
• Home Loan: New or under-construction property
• LAP: Existing, self-owned residential/commercial property
3. Loan Amount
• Home Loan: These loans usually come with a high Loan-to-Value (LTV) ratio, covering as much as 90% of the property’s cost.
• LAP: Lower LTV, around 60–70% of market value
4. Comparing Interest Rates: Home Loan vs Loan Against Property
• Home Loan: Lower rates, starting around 8–9% per annum
• LAP: Loans against property generally have higher rates, typically 9–12%
5. Tenure
• Home Loan: Up to 30 years
• LAP: Usually up to 15–20 years
6. Tax Benefits
• Home Loan: Eligible for tax deductions under Section 24 (interest) and 80C (principal)
• LAP: No standard tax benefits unless used for business (under certain conditions)
7. Processing Time & Disbursement
• Home Loan: Involves more scrutiny and longer approval timelines
• LAP: Quicker if documents and valuation are in place
8. Risk Factor
• Home Loan: Risk is limited to future property
• LAP: Higher risk—defaulting can result in losing your existing property.
Comparison Table: Home Loan vs. Loan Against Property
FactorsHome LoanLoans Against Property (LAP)
Eligibility CriteriaIndividuals must have a consistent source of income and fulfill specific credit score standards imposed by lenders in order to qualify for a house loan.In addition to income stability and credit score, lenders assess the value of the mortgaged property and its legal status when authorizing a loan against property.
Loan AmountHome loans provide bigger loan amounts than loans against property as they cover up to 80% of the property’s worth.A loan against property offers a minimum mortgage loan amount value of up to 60%.
Interest RatesHome loan interest rates can be fixed or floating, with floating rates of 8%.Interest rates for loans against property generally range between 9% and 12%, depending on the lender and borrower profile.
Repayment TenureHome loans provide prolonged payback periods, allowing borrowers to spread out their payments over a longer period of time.Loans against property, similar to home loans, offer extended repayment tenures, allowing borrowers to have flexibility in repaying their loans.
Tax BenefitsHome loans qualify for tax deductions under Sections 24(b) and 80C of the Income Tax Act.There are no tax benefits applied.
Utilisation of FundsHome loans are only available for the purchase or building of residential homes.Loans against property allow borrowers to use funds for various purposes such as business expansion, education expenses, and medical emergencies.
Which One Should You Choose?
1. Based on Financial Needs
• Want to buy a house? Go for a home loan.
• Need money for business, education, or emergencies? LAP makes more sense.
2. Based on Ownership Status
• First-time buyers with no property: A home loan is your only option.
• Already own property? You’re eligible for LAP.
3. Based on Tax Planning
If tax benefits are your priority, a home loan provides significant deductions. LAP usually doesn’t.
4. Based on Repayment Capacity
Whether a home loan is suitable or not depends on your repayment capacity. This usually translates to lower EMIs. LAP might offer faster disbursal but at a higher cost.
Expert Tips for Choosing the Right Loan
Choosing between a home loan and a loan against property (LAP) doesn’t have to be confusing. Here are some practical tips to help you make the right decision based on your goals, financial situation, and risk appetite:
1) Know Your Objective
Start by asking yourself: Why do I need the loan?
• If your goal is to buy, build, or renovate a house, a home loan is the ideal choice.
• If you already own a property and need funds for education, business expansion, or a medical emergency, a LAP offers the flexibility to use the money however you need.
2) Assess Your Repayment Ability
Before applying, take a close look at your income and expenses.
• A home loan usually comes with longer tenures (up to 30 years), which can make monthly EMIs lower and more manageable.
• LAPs may offer quicker approvals but generally have slightly higher interest rates, which means higher EMIs in some cases.
3) Factor in Tax Benefits
• Home loans offer tax deductions under Section 80C (on principal) and Section 24(b) (on interest), helping reduce your annual tax outgo.
• LAPs don’t usually offer these benefits unless the loan is used for specific business-related purposes.
4) Consider Loan Processing Speed
If you need funds urgently, a loan against property may be approved faster (especially if your documents and property valuation are in place).
In contrast, home loans often involve more steps and verifications, especially for under-construction properties.
5) Understand the Risk Involved
• With a home loan, the risk is usually tied to a future asset (the new house).
• With a LAP, you’re pledging an existing property, which could be seized if you fail to repay. Always borrow within your comfort zone.
6) Check Loan-to-Value Ratio (LTV)
• Home loans can finance up to 90% of the property value.
• LAPs usually offer 60–70% of the property’s current market value. Make sure this meets your funding needs.
7) Consult a Financial Advisor if in Doubt
Everyone’s financial situation is different. If you’re unsure which loan suits you best, it’s wise to speak with a financial advisor or loan expert who can guide you based on your income, liabilities, and goals.
8) Last but not the least
Don’t just go for the loan with the lowest interest rate. Look at the bigger picture—what are your needs, how soon can you repay, and how much risk are you comfortable with?
FAQs
Q1. Can I use a home loan for business purposes? No, a home loan is specifically meant for purchasing, constructing, or renovating a residential property. If you’re looking to raise funds for business purposes, it’s better to opt for a Loan Against Property (LAP), which gives you more flexibility in how you use the money.
Q2. Is loan against property same as home loan? No, they are different. A home loan is used to buy or build a house, while a loan against property allows you to borrow money by pledging your existing property—whether residential or commercial—as collateral. The purpose and terms of both loans are quite different.
Q3. What is the disadvantage of a loan against property? The biggest risk with LAP is losing your property. If you’re unable to repay the loan, the lender has the legal right to take over and sell your property to recover the money. So, only take a LAP if you’re confident in your repayment ability.
Q4. How to get loan against property? To get a LAP, you must:
Own a residential or commercial property with clear legal title
Have a stable source of income
Maintain a good credit score
Provide documents like property papers, income proof, and ID/KYC
Once you meet the eligibility, approach your preferred bank or NBFC to start the application process.
Q5. Is it possible to switch between LAP and home loan? No, you cannot directly switch from a LAP to a home loan or vice versa. They are meant for different purposes and are processed under different guidelines. If your financial needs have changed, you may need to close the current loan and apply for a new one that suits your updated goal.
Conclusion
Both home loans and loans against property can be powerful financial tools—but only when used wisely. A home loan is ideal if you’re investing in a property, thanks to its lower interest rates and longer repayment periods. On the other hand, a LAP offers more flexibility and quicker access to large funds if you already own a property.
Before making a decision, evaluate your financial goals, the urgency of your need, and your ability to repay. A well-informed choice can save you money, reduce risk, and give you peace of mind.
Also read: Difference Between Home Loan And Mortgage Loan