What is a Home Loan?
A home loan is a type of financial arrangement where a borrower takes money from a bank to purchase a house, flat, or construct a new home. You can also take a home loan for the renovation of your existing house or for buying land. This type of loan is generally a secured form of credit, where the house for which the loan is taken serves as collateral held by the lender. The loan is disbursed under the condition that the borrower will repay the entire loan amount in monthly installments. If the borrower is unable to repay the loan and becomes insolvent, the lender has the right to foreclose the property to recover the outstanding amount.
The loan-to-value (LTV) ratio, or the percentage of the amount that can be financed through a home loan, is typically around 85-90%. This is one of the significant differences between a home loan and a mortgage loan. Additionally, a home loan comes with options for both fixed and floating interest rates. The tenure of a home loan in India can be up to 30 years. There is also a processing fee on home loans, which typically ranges from 0.5-1% of the loan amount.
What is a Mortgage Loan(Loan Against Property)?
Unlike a home loan, a mortgage loan can be taken and used by the borrower for any purpose. However, it shares a similarity with a home loan— the lender takes ownership of the borrower’s property until the repayment is completed. The LTV ratio in a mortgage is 60-70%, meaning the borrower is eligible to receive only 60-70% of the current market value of the collateral as a loan. The processing fee for these loans is usually around 1.5% of the loan amount, and a top-up facility is also available. This facility allows the borrower to obtain additional funds on an existing loan without much paperwork. In a mortgage loan, the tenure can extend up to 15 years. The interest rates on mortgage loans are slightly higher (1-4%) compared to the rates offered on home loans.
Home Loan vs. Mortgage Loan(Loan Against Property)
| Aspect | Home Loan | Mortgage Loan |
|---|---|---|
| Definition | A loan specifically provided for purchasing or refinancing residential property. | A broader term that includes loans secured by real estate, including residential properties. |
| Purpose | Primarily used for purchasing a house or residential property. | Can be used for various purposes, including buying or refinancing a house. |
| Collateral | The property being purchased acts as collateral. | The financed property must be used as collateral. |
| Borrower | Typically for individual homeowners. | Available to individuals only. |
| Loan Tenure | Generally has a longer tenure, such as 15 to 30 years. | The tenure for a mortgage can extend up to 15 years. |
| Ease of Use | Often more accessible to individual borrowers. | Accessible to both individuals and businesses. |
| Tax Benefits | Interest paid on a home loan is eligible for tax deductions. | Tax benefits on interest paid can only be claimed under Section 37(1) of the Income Tax Act if the loan amount is used for business purposes. Borrowers must provide proof to confirm that funds were used exclusively for business purposes. |
| Documentation | Documentation requirements are specific to residential property transactions. | Documentation requirements may vary depending on the property type and loan purpose. |
| Appraisal | Property appraisal is a standard part of the home loan process. | Appraisal is typically required to accurately assess the property’s value. |
| Insurance | Homeowners insurance is required to protect the property and the lender. | Property insurance is usually required to protect the interests of both the property and the lender. |
| Usage of Funds | Funds are explicitly for buying or refinancing a house. | Funds can be used for various purposes, such as hospital expenses, weddings, higher education, and/or business expansion, etc. |
| Closing Costs | Includes closing costs related to the property purchase transaction. | Closing costs may apply, varying based on the loan type and terms. |
| Type of Lender | Typically offered by Housing Finance Companies (HFCs), NBFCs, and banks. | Provided by various financial institutions, including banks, mortgage companies, and private lenders. |
| Down Payment Requirements | Usually requires an upfront payment, the amount of which varies based on factors such as loan type and credit. | Does not require an upfront payment. |
Both are may seem similar but they are quite different.
Home Loan
The purpose of a home loan is solely for the construction of a new home or the purchase of such property that is ready for the borrower to live in.
In the case of home loans, the loan-to-value ratio is higher. The borrower can get a loan of up to 90% of the property’s market value.
The interest rate on home loans is lower compared to mortgage loans.
The processing fee for home loans is typically between 0.8% to 1.2% of the loan value.
The repayment tenure of home loans is one of the longest tenures given to borrowers, which can go up to 30 years.
Mortgage Loan
With mortgage loans, the borrower has the freedom to use the money in any way they want.
There are no restrictions on how the loan money can be used.
The borrower can use the money to meet any home-related expenses or any personal needs.
Unlike home loans, the loan-to-value ratio is comparatively lower with mortgage loans.
The borrower can get a loan of up to 60% to 70% of the property’s market value.
The interest rate charged on mortgage loans is typically 1% to 3% higher than home loans.
The processing fee for mortgage loans is also higher compared to home loans.
Typically, lenders charge around 1.5% of the loan value as processing fees.
The repayment tenure of mortgage loans is typically up to 15 years.
Borrowers also get a top-up facility, wherein they can get additional funds on existing loans, usually without any additional paperwork.
Conclusion
Understanding the differences between home loans and mortgage loans is crucial for anyone navigating the complex landscape of real estate financing. Home loans generally refer to a broad category of loans used to purchase or refinance residential properties, encompassing various types of financing. On the other hand, a mortgage loan specifically pertains to the legal agreement between the borrower and the lender, outlining the terms and conditions for financing a property.
Recognizing these differences enables individuals to make informed decisions, ensuring they choose the most suitable financial option for their specific needs and circumstances. Ultimately, whether it’s acquiring homeownership or leveraging property assets, a comprehensive understanding of home loans and mortgage loans is essential for financial success in the real estate domain.
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FAQs
Question: What is the main difference between a home loan and a mortgage loan?
Answer: A home loan is specifically provided for purchasing or refinancing residential property, while a mortgage loan can be taken by the borrower for any purpose.
Question: What is the loan-to-value (LTV) ratio for home loans and mortgage loans?
Answer: The LTV ratio for home loans typically ranges between 85-90%, whereas for mortgage loans, it is usually between 60-70%.
Question: What is the tenure of home loans and mortgage loans?
Answer: The tenure for home loans can extend up to 30 years, whereas for mortgage loans, it can go up to 15 years.
Question: Can I use a mortgage loan for personal expenses?
Answer: Yes, a mortgage loan can be used for various purposes, including personal expenses, whereas a home loan is strictly for purchasing or refinancing residential property.
Question: What are the tax benefits of home loans and mortgage loans?
Answer: The interest paid on a home loan is eligible for tax deduction, whereas the interest on a mortgage loan is only tax-deductible if the loan amount is used for business purposes.
Question: What documents are required for home loans and mortgage loans?
Answer: Documents required for both home loans and mortgage loans typically include proof of income, identification, property documents, and other financial documents.
Question: Can I apply for both a home loan and a mortgage loan simultaneously?
Answer: No, home loans and mortgage loans are different types of loans, and you can only apply for one at a time.
Question: What are the interest rates for home loans and mortgage loans?
Answer: The interest rates for home loans and mortgage loans depend on the lender and the terms of the loan.
Question: Can I prepay my home loan or mortgage loan?
Answer: Yes, you can prepay both home loans and mortgage loans, but you should contact your lender first.
Question: What are the repayment options for home loans and mortgage loans?
Answer: Repayment options for both home loans and mortgage loans include EMIs, lump sum payments, and other alternatives.
Question: What is a balance transfer for home loans and mortgage loans?
Answer: A balance transfer is a process where you transfer your existing loan to a new loan, often with a lower interest rate and better terms.
Question: What is the importance of a CIBIL score for home loans and mortgage loans?
Answer: A CIBIL score is a measure of your credit history that determines your loan eligibility. A good CIBIL score can help you secure better interest rates and terms for home loans and mortgage loans.
Question: How do I perform a balance transfer for home loans and mortgage loans?
Answer: To perform a balance transfer, compare the terms of your existing loan with a new one, and then apply with your new lender.
Question: How can I improve my CIBIL score for home loans and mortgage loans?
Answer: To improve your CIBIL score, make timely payments on your loans, reduce your credit utilization, and correct any errors in your credit report.
