What is the Difference Between Housing Finance and a Home Mortgage?

A person may require a loan for different financial reasons in life. Given the circumstances, various loan products are available in the market today. It is easy to get confused between some of them. A Couple of examples are housing finance and home mortgages. 

Strictly speaking, housing finance and home mortgage are technically the same things. A mortgage refers to pledging property as collateral in order to get a loan. If the loan amount is specifically used to buy a new home, and it is this home that is being pledged as an asset, then such a loan is called A home finance or a home mortgage. If the pledged collateral is an existing residential or commercial property already owned by the borrower who only needs funds to fund large purchases such as wedding arrangements, children’s future education, business requirements, etc; then such a mortgage loan is called a loan against property (LAP).

Housing finance refers to the area of finance that deals with various aspects of financing the purchase of properties or pledging existing properties in order to secure a loan. 

Simply put, a borrower takes a home loan to purchase or construct a new house. The borrowers get possession but do not gain ownership of the property until they repay the borrowed amount along with the interest rate. However, in the case of a LAP, the borrower already owns the property, which they put as collateral to borrow a loan from the lender. Since both loan types serve different purposes, which one is better is irrelevant. Here is an explanation of these two loan types and how they are different from each other.

What is a Home Loan?

A home loan is a secured loan type that the borrower may avail to purchase or construct a residential property. The lender offers a certain percentage of the property’s value as a loan, and the borrower pays the remaining amount from their savings as a down payment. In this type of loan, the home purchased works as collateral. 

The lender keeps the property’s ownership until the borrower repays the entire principal loan amount along with the current home loan interest rates through the loan term. Once the borrower repays the loan, the lender transfers the ownership to them. However, if the borrower fails to repay the loan, the lender sells off the property to get their money back.

What is Loan Against Property?

A LAP is another type of secured loan that an applicant avails against a property they already own. Also known as a loan against property, it offers funding based on the property’s market value. While a borrower takes home finance to purchase a house, the borrower can use a mortgage loan for any big-ticket expense. However, one thing is similar between a home loan and a home mortgage: the lender gains the property’s ownership until the borrower repays the borrowed amount.

Points of Difference:

While both home loans and LAP take the borrower’s property as collateral, these are a few points of difference between them:

    1. End-Use Restrictions:

      A home loan is specifically meant to buy a residential property, renovate a home, or construct a house. When borrowers take a LAP, they can use their loan amount for any planned or unplanned expenses they want to cover.

    2. Loan-to-Value Ratio:

      The LTV ratio that a home loan can finance is higher in the case of a home loan. One can get up to 90% of the property’s price depending on their eligibility and pay the remaining amount as a down payment. However, in the case of a LAP, the applicant can borrow 60-70% of the property’s worth, depending on their eligibility.

    3. Loan Tenure:

      Mortgage loans come under the category of long-term loans. However, housing finance loans can have a tenure of up to 30 years, while a LAP comes with a shorter loan tenure of up to 15 years.

    4. Interest Rate:

      Since the government aims at “Housing for All” within a few years, it offers different types of subsidies and exemptions, making current home loan interest rates much lower than before. However, there are no such facilities on LAP. As a result, interest rates for LAP are higher than those for home loans.

    5. Processing Fee:

      The loan processing fee for a home loan is lower than a mortgage loan. It can be 0.8-1.2% for a home loan, but for a LAP, it may be up to 1.5% of the loan amount.

    6. Tax Benefits:

      Home loans allow borrowers to claim tax benefits upto INR 3.5 lakhs per year. There is no tax benefit on LAP.

Mortgage loans offer secured finance to borrowers in times of need. However, home loans and loans against property have different purposes and terms and conditions. A Home loan allows the borrower to get the property’s ownership after the loan repayment, and thus may be viewed as an investment. A Loan against Property is an expense because the borrower pledges their property as collateral until they repay the borrowed amount in full.

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