6 MinsJuly 1, 2022
Raj Krishnan, 32, and Harshal Shah, 38, are planning to avail of loans by offering a property as collateral. However, there is a big difference between their objectives, nature of the loans and interest rates. Let’s understand this better.
Raj and his wife have steady jobs in the private sector and plan to buy a flat. They have approached the bank for a home loan. Harshal owns a general store that he wants to expand and needs capital that he could invest in leasing and refurbishing
an adjacent property. He has applied for a Mortgage Loan.
The bank will treat both these applications differently because of the inherent difference in their purposes – though in both cases, the loans will be secured by some real estate.
Here are the differences:
A Home Loan is given to people either buying a house or constructing a house.
On the other hand, a loan that is given against property is known as a Mortgage Loan or Loan Against Property (LAP). In this case, the property is collateral or security that is pledged with the bank. The property could be residential or commercial
Conditions to keep in mind
In both cases, the collateral for the loan is property – one that Raj is planning to buy and one that Harshal already owns. The Bank will assess both applicants' incomes, creditworthiness
and ability to repay. There is, however, a crucial difference between the two loans.
A Home Loan comes with end-use restrictions. Raj can only use the funds from his loan to buy or construct a property or refurbish an existing property. Home loans – where you take a loan to buy a house have always been encouraged by governments
worldwide. The collateral, of course, is the property you are buying.
Mortgage Loans – or LAPs – are treated as just another form of a secured loan. Harshal, in our example, could be offering property or any other asset like gold or securities as collateral. As a result, a Mortgage Loan or LAP doesn’t
come with any end-use restrictions. Harshal can use the funds as he deems fit, for personal or business purposes.
[Also Read: What Type of Home Loan is the Best one for You?]
While both loans are secured by an asset – the flat Raj is buying, or the property Harshal is pledging- banks tend to treat the loans differently and charge different interest rates.
For example, for a home loan, the kind Raj is applying for, banks will charge interest as RBI’s Repo Rate plus spread. A Mortgage Loan or a LAP, the kind that Harshal is applying for, will attract a higher rate of interest, typically 1-3%
higher than the home loan interest rates.
Raj, while applying for a home loan, can opt for a tenure of up to 30 years. This will reduce his EMI (Equated Monthly Instalments), though he will pay a higher interest amount.
For a Mortgage Loan or LAP, the tenure is generally capped at 15 years. The combination of these two factors – higher interest rate and the lower term means that Harshal’s EMI is likely to be higher than what Raj pays for the same
Loan to Value Ratio (LTV) is the amount of loan a bank will grant against its assessment of the worth of the property. For a Home Loan, the LTV is much higher – often as high as 90%. However, for a LAP, the LTV
is not likely to exceed 60-70%. What this means is that for a similarly valued property, Raj, who is taking a home loan, may get a higher amount than Harshal, who is taking a LAP or Mortgage Loan.
Home Loans generally tend to attract a far lower processing fee than a LAP. While the processing fee for a Home Loan is likely to be 0.8-1.2% of the loan value, it can rise to about 1.5% for a LAP.
Axis Bank has a variety of affordable home loan and mortgage loan products to meet its customers’ diverse needs. You can know more about emi calculator for home loan online.
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