Key Differences Between Home Loans and Loans Against Property: What You Should Know

Before choosing between a home loan and a loan against property (LAP), it’s important to understand how they differ. A home loan helps you buy or build a new residential property, while a loan against property allows you to borrow funds by pledging your existing property as collateral. Both are secured loans, but they serve different purposes and come with distinct terms. The key difference lies in fund usage and borrowing limits—home loans are strictly for property-related expenses, whereas LAP offers complete flexibility for any financial need.

Breakdown of Key Differences

Understand the key differentiators between a home loan and a loan against property with the table given below: 

Purpose and End-use: Where Your Money Goes

• Home loans are strictly for buying, constructing, or renovating a residential house. The lender links the loan to the specific property.
• You cannot use home loan funds for non-property-related expenses such as business needs, education, or medical bills.
• Loans against property, however, offer you the freedom to use the funds for any purpose.
• Whether you need money for your child’s wedding, medical emergencies, business expansion, or debt consolidation, loans against property accommodate your needs.
• This flexibility is the biggest advantage of loans against property compared to home loans.

Loan Amount and Loan-to-Value Ratio (LTV)

The loan-to-value (LTV) ratio determines the amount you can borrow as a percentage of your property’s market value.

Home loans offer a higher LTV as they fund new asset acquisition. Loans against property involve more risk, so the LTV is lower.

Interest Rates: Cost of Borrowing

Interest rate differences reflect loan purpose and risk.

• Home loan interest rates typically range from 8% to 10.5% per annum.
• ICICI Bank offers competitive home loan rates starting around 6.80% per annum.
• Loans against property attract higher interest rates, commonly between 10.60% to 12.25% per annum. The ICICI Bank Loan Against Property interest rate falls within this range.
• The flexibility in the use of funds and existing property risks justify the higher rates.
• Online loan against property options usually come with competitive rates and quicker processing.
• It is essential to compare interest rates offered by multiple lenders before applying.

Loan Tenure: Your Repayment Timeline

Loan durations affect monthly instalments and total cost.

• Home loans typically offer longer tenures, usually up to 30 years, making your monthly instalments more affordable.
• Loans against property have shorter tenures, generally between 10 and 20 years. ICICI Bank offers up to 15 years tenure for LAP.
• The shorter LAP tenure increases monthly EMIs. Ensure your repayment capacity aligns with this.
• Some lenders provide options to prepay or partially prepay, which may reduce interest costs.
• You can apply for an online loan against property to benefit from flexible tenure options and easy repayments.

Eligibility Requirements: Who Qualifies

Eligibility criteria balance risk and borrower reliability.

• Both loans require identity proof, address proof, income proof, and bank statements.
• For home loans, you must submit proof of property purchase or construction approval.
• For loans against property, proof of ownership and clear title for the existing property is compulsory.
• Lenders generally expect a credit score above 750 for both loans.
• Qualifying borrowers include salaried individuals and self-employed professionals alike.

Documentation

Documentation ensures verification; fees vary by loan type.

• Common documents include identity proof, address proof, income proof, and bank statements for both loans.
• Home loan documentation requires the property sales agreement or sanctioned construction plan.
• LAP applications must include property deeds and title documents.
• Property valuation differs: home loans assess the purchased property; LAP valuers check the current market value of the existing asset.

Tax Benefits

Home loans offer tax deductions under Indian Income Tax laws—Section 80C allows exemption up to ₹1.5 lakh on principal repayment, and Section 24(b) offers deduction on interest paid up to ₹2 lakh per annum. These deductions reduce your taxable income and overall loan cost. Loans against property generally do not come with tax benefits unless the loan is used exclusively for business or income-generating purposes. Hence, tax benefits can be a deciding factor when choosing between the two.

Making Your Choice: Which Loan Suits You

• Opt for a home loan if your goal is to purchase, build, or renovate your residential property.
• Home loans provide lower interest rates, longer tenure options, and tax benefits on principal and interest.
• Choose a loan against property if you require funds for reasons beyond housing, such as business expansion, weddings, or emergencies.
• Loans against property come with higher interest rates and shorter tenures.
• Carefully assess your repayment capacity and financial goals before deciding.
• Always compare options from multiple lenders