When it comes to borrowing funds using property as collateral, it’s essential to understand the distinctions between the different types of loans available. Mortgage loans, home loans, and loans against property (LAP) are often used interchangeably, but they serve different purposes and have unique features. In this guide, we’ll break down the differences between these loan types so you can choose the best option for your financial needs.
1. What is a Mortgage Loan?
A Mortgage Loan is a broad term used to describe any loan that is secured by real estate property. It includes various types of loans where the borrower provides property as collateral. The term “mortgage” simply means that the loan is secured by a real asset, such as land or a building. There are different forms of mortgage loans, including both home loans and loans against property.
- Purpose: Mortgage loans can be used for a wide range of purposes, such as purchasing property, business expansion, personal needs, or investment.
- Collateral: The collateral is typically any property, residential or commercial.
- Loan Amount: The loan amount depends on the value of the collateral, typically ranging between 60-70% of the property’s market value.
2. What is a Home Loan?
A Home Loan is a type of mortgage loan specifically meant for purchasing or constructing a residential property. It is the most common type of loan that people seek when buying a house or apartment.
- Purpose: A home loan is strictly for the purchase of a house, flat, or for the construction of a new home. Some banks also offer home loans for home renovation or expansion.
- Collateral: The residential property being purchased or constructed is typically used as collateral.
- Loan Amount: Home loans can cover up to 75-90% of the property’s value, depending on the lender’s policies and the borrower’s creditworthiness.
- Tax Benefits: One major advantage of a home loan in India is that borrowers can claim tax deductions under sections 80C and 24(b) of the Income Tax Act, for principal repayment and interest payment, respectively.
3. What is a Loan Against Property (LAP)?
A Loan Against Property (LAP) is a type of mortgage loan where the borrower uses their existing residential or commercial property as collateral to obtain funds. LAP is a popular option for those who want to leverage their property for financial needs without selling it.
- Purpose: LAP can be used for various purposes, such as funding business expansion, education, medical emergencies, or any personal needs.
- Collateral: The borrower mortgages an existing property, which could be residential, commercial, or industrial.
- Loan Amount: Typically, lenders offer around 50-70% of the property’s market value as a loan under LAP.
- Flexibility: Unlike home loans, LAP offers flexibility in terms of usage, as the funds can be used for any personal or business-related financial needs.
Key Differences at a Glance:
| Feature | Mortgage Loan | Home Loan | Loan Against Property (LAP) |
|---|---|---|---|
| Purpose | General-purpose, varies (business, personal, etc.) | Purchase or construction of a house | Any purpose, including business or personal |
| Collateral | Any real estate property | Property being purchased or constructed | Existing property (residential or commercial) |
| Loan Amount | 60-70% of property value | 75-90% of property value | 50-70% of property value |
| Tax Benefits | Depends on the type of loan (e.g., home loan tax benefits) | Available on principal and interest under sections 80C and 24(b) | None specifically related to tax benefits |
| Interest Rates | Typically higher than home loans | Lower interest rates, as it’s for specific purpose | Generally higher than home loans |
| Usage Flexibility | High, can be used for any financial need | Restricted to purchasing or constructing a home | High, can be used for any financial need |
Conclusion
While all three loans involve property as collateral, the main difference lies in their purpose and scope. Home loans are specifically designed for buying or constructing residential property, with added tax benefits. Loan against property (LAP) allows you to leverage your existing property for varied personal or business expenses. Mortgage loans serve as a broader category encompassing various secured loans, including both home loans and LAP.