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11/12/2018 Home loan versus loan against property: Crucial differences | Housing News

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Crucial differences


Home loan versus loan against

property: Crucial differences
When it comes to raising money, should a borrower opt for a loan against property or a home loan?
We examine…

A home loan is taken for the purpose of either buying a ready-to-move-in house or for the purpose
of booking an under-construction property. Home loans are available for residential, as well as
commercial properties. On the other hand, a loan against property is generally taken, for the
purpose of raising additional funds for business. The loan against property may be obtained in two
forms. It can be a pure loan, under which, a lump sum is paid to the borrower, against the security
of an immovable property. Alternatively, a line of credit may be set up in the form of an overdraft
facility with a set limit, based on the value of the property and repayment capacity of the borrower.

Loans against property may also be obtained for personal purposes like education or marriage in
the family. A loan against property can also be availed, to finance the purchase of another property,
in case it is not possible to get a home loan against the property, due to any technical reasons like
defect in the title of the property being purchased. The security pledged, for taking a loan against
property, may be a residential or commercial property. In case of a home loan, the property to be
purchased is pledged with the lender, whereas in case of a loan against property, another property
is pledged and not the house that is being purchased.

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See also: Loan against property: What you need to know (https://housing.com/news/loan- 똔


Tax benefits of home loans and loan against

For home loans taken to buy a residential house property, the borrower can claim twin tax benefits
under the income tax laws. The first benefits is for the repayment of the principal component of the
home loan, which is available under Section 80 C, upto Rs 1.50 lakhs for all the residential
properties taken together. This deduction of Rs 1.50 lakhs is available along with other eligible
items like public provident fund, contribution towards employee provident fund, life insurance
premium, school fee for children, national savings certificates, ULIP, ELSS, etc. The other benefit is
available under Section 24(b), for the interest paid on such loans. This benefit can be availed even
for commercial properties and also on amounts borrowed from friends and relatives.

For a loan against property, the availability of tax benefits will depend on the ultimate
use of the money borrowed. If the money is used for the purpose of your business,
the interest paid and the incidental costs, like processing fee and documentation
charges, can be claimed as business expenditure under Section 37(1) of the Income
Tax Act. If the loan is used for personal purposes like marriage or education of your
child, the interest on the same cannot be claimed under the present tax laws. If the
money is used for the purpose of financing another house property, then, the same
can be claimed under Section 24(b) of the Income Tax Act
(https://housing.com/news/home-loans-guide-claiming-tax-benefits/). The interest
claim would be allowed, only if you are conclusively able to establish the link between
the money borrowed and its ultimate use.

However, you cannot claim any benefit for the principal repayment on a loan against property that
is taken to finance another house, as the money borrowed cannot be treated as a home loan.

Margin requirements and rate of interest for home

loans and loan against property

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To safeguard themselves against a decline in the market value of the asset, lenders do
not lend the full value of the security/underlying asset. This difference that the lender
retains while lending, is called the margin. The margin money in the case of a home
loan, is the money that the borrower is supposed to finance on his own. The margin
requirement for home loans is generally regulated by the Reserve Bank of India, in the
case of banks and by the National Housing Bank, in the case of housing finance
companies. The margin money also depends on the amount of home loan availed. The
maximum loan that a lender gives, is only upto 90 per cent of the value of the
property. So, the buyer has to put in 10 per cent. For high-ticket home loans, the
margin requirement can increase to 25 per cent. For loan against property, which is
not covered under priority sector lending, the lenders have to keep a higher margin,
which can range from 24-40 per cent of the property.

The rate of interest on home loans (https://housing.com/in/home-loans/faq) is generally in the

range of 9-12 per cent, depending on the type of lender and the profile of the borrower. The rate of
interest on loan against property, is generally higher than home loans but lower than personal
loans. The rates may vary from 11-14 per cent, again depending on the type of lender and profile of
the borrower.

Hence, a home loan is the best option, for persons who want to buy a readymade house or book an
under-construction property. However, in case you have any title defect in the property to be
purchased, you can finance the same by way of a loan against your existing property.

(The author is a tax and investment expert, with 35 years’ experience)

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