Differences between a 'Home loan' and a 'Loan against property'

21-Jul-2016 , 02:40:14 pm | By Mahesh Bansal print

I have observed that many people can not differentiate correctly between a 'home loan' and a 'loan against property'. Many people call me to inquire about a 'home loan' against security of a property already owned by them. It is not a 'home loan'. Instead, it is a 'mortgage loan' or a 'loan against property' or a 'LAP'. In fact, most of the people think the two are same.

So, to facilitate them for clear understanding of the two concepts, I am going to explain 10 major differences between a 'home loan' and a 'loan against property'.

1. Purpose- a home loan is granted for purchase or construction of a new house whereas a 'loan against property (LAP)' is granted for some other purpose against security of an existing property. In other words, where a 'home loan' is granted, the property is not already owned by the borrower and the loan is granted to acquire or to construct a property (in some cases, home loan is granted for renovation/repair/addition also) whereas in case of a 'LAP' the mortgaged security is already owned by the borrower and he avails a loan against this property for some other purpose.

2. Quantum of loan- a home loan can be granted up to 90% of the value of the property whereas the LAP generally does not exceed 60% of the value of the property. This is because, the government and the RBI promotes 'housing for all' by minimizing the margin requirement in case of a home loan.

3. Interest- the rate of interest is always higher in case of a LAP than a home loan for the same reason, noted above.

4. Tenure of loan- a home loan can be granted for up to 30 years whereas a LAP is generally not granted for a tenure exceeding 15 years by most of the banks/FIs.

5. Tax exemption- the tax deductions under sections 24 (for interest) and 80C (for principal) are available in case of a home loan only. These deductions are not available in case of a LAP. (However, if the LAP was taken for business purpose, the deduction of interest can be availed under the head 'income from business and profession' but the deduction of principal amount of LAP is not available in any case.)

6. Restrictions- the provisions of 'home loan' are very relaxed whereas provisions of LAP are stringent.

7. Prepayment charges- Prepayment charges are waived in case of prepayment of a home loan as per RBI directions, whereas such charges are generally imposed by banks in case of prepayment of a LAP.

8. Priority sector lending- home loans are considered under 'priority sector lending' as per RBI norms whereas LAP is not considered under 'priority sector' (However, if LAP was availed for MSME business entity or some other purpose classified as a priority sector lending, the same will be classified under 'priority sector')

9. Monitoring- banks undertake strict monitoring on proper utilisation of a home loan whereas the borrower is free to utilize the proceeds of a LAP for any purpose except for gambling, stock market investments, speculative business etc.

10. Nature of property- a home loan shall always be granted to purchase or construct only a 'residential property' whereas a LAP can be granted against a residential, commercial or industrial property.

I hope, now you will be more confident in dealing with your clients and correctly ascertaining whether he is in need of a 'home loan' or a 'LAP'

CA Mahesh Bansal
9716263569

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