Home Equity Loan vs Home Loan: Key Differences

Understanding the distinctions between a Home Equity Loan and a Home Loan can empower homeowners and prospective buyers to make informed financial decisions. Both these loan options are crucial tools in managing property-related finances but serve very different purposes. This blog will explain the fundamental differences, helping you recognise when to opt for a loan against existing property equity versus a loan to purchase or construct a home. Knowing these can help unlock smarter borrowing choices and financial flexibility.

What is a Home Equity Loan?

A Home Equity Loan allows homeowners to borrow against the equity they have built in their property. It is essentially a secured loan where your home acts as collateral. The loan is ideal for individuals seeking funds for purposes such as home renovation, education, debt consolidation or medical expenses without selling their property.

Key points about Home Equity Loans:

• Eligibility: Must own a property with sufficient equity; a stable income and good credit score are required.
• Loan Amount: Typically up to 75–90% of the property’s current market value minus any existing home loan balance, depending on the loan size as per RBI guidelines.
• Use Cases: Home improvements, debt consolidation, higher education fees or personal financial needs.
• Repayment: Can be structured as EMIs or flexible repayment options, depending on the lender.
• Processing Time: Generally faster than a new Home Loan, as collateral is already available.

Home Equity Loans provide access to funds without affecting the ownership of your property while offering comparatively lower interest rates than unsecured personal loans.

What is a Home Loan?

A Home Loan is a secured loan specifically designed to finance the purchase or construction of a residential property. The property itself serves as collateral, and repayment is structured over a longer tenure to make EMIs affordable.

Key points about Home Loans:

• Purpose: Primarily for buying, constructing, or extending a home.
• Eligibility: Applicant must meet income criteria, maintain a good credit score and provide relevant property and income documents.
• Loan Amount: Determined by the property value, applicant’s repayment capacity and lender guidelines.
• Usage Restrictions: Funds must be used solely for property-related purposes; using them for other purposes may attract penalties.
• Tenure: Typically ranges from 5 to 30 years, depending on applicant preference and lender norms.

Home Loans are ideal for first-time buyers or individuals looking to invest in property while leveraging long-term repayment flexibility.

Home Equity Loan vs Home Loan – Key Differences

Purpose and Usage

A Home Equity Loan provides flexibility for multiple financial goals beyond property acquisition. Homeowners often use it for home renovation, debt consolidation, higher education or medical expenses. Conversely, a Home Loan’s primary purpose is to fund property purchase or construction, and funds cannot be diverted to non-property needs.

Loan Amount & Eligibility

The loan amount for a Home Equity Loan is calculated based on the equity in your existing property, generally 70–80% of the current market value minus any outstanding loan. Home Loan amounts are based on property value, applicant income, and repayment capacity.

Eligibility factors include:

• Stable income and employment
• Good credit score (700+ recommended)
• Ownership of property for a Home Equity Loan
• Age criteria (usually 21–65 years)
• Submission of KYC and income documents

Interest Rates and Tenure

Home Equity Loans usually carry fixed interest rates and shorter tenures (5–15 years), making them suitable for targeted funding needs. Home Loans offer fixed or floating rates with longer tenures (up to 30 years), allowing lower EMIs but an extended repayment tenure. Prepayment and part-payment options are available for both loans, though terms may vary by lender.

Collateral and Risk

Both loans are secured by property. Defaulting on a Home Equity Loan or Home Loan can result in foreclosure, affecting credit history and ownership rights. Home Equity Loans carry lower risk for lenders due to existing collateral, while Home Loans are riskier for new borrowers, as collateral is the property being acquired.

Also Read: Home Loan vs Mortgage Loan

Tax Benefits on Home Loan vs Home Equity Loan in India

Home Loans are eligible for tax benefits under the Income Tax Act:

• Section 80C: Deduction on principal repayment up to ₹1.5 lakh per annum.
• Section 24(b): Deduction on interest payment up to ₹2 lakh per annum for self-occupied properties.

Home Equity Loans offer limited tax benefits:

• Tax benefits apply only if the loan is used for home renovation or improvement of the existing property.
• Section 24(b) allows a deduction for interest paid on renovation, subject to limits and tenure conditions.

Example:

• Mr A has an outstanding Home Loan and takes a Home Equity Loan to renovate his property. Interest on the Home Loan continues to be eligible for Section 24(b). Interest on the equity loan is also deductible if used for property improvement. If used for personal purposes like education or debt consolidation, the tax benefit is not applicable.

Recent amendments specify deductions for interest only if used for the improvement of the existing residential property, and limits under both sections remain unchanged.

Which Loan is Right for You?

Scenario 1 – Buying a New Home:

• Home Loan: Ideal for first-time buyers; long tenure and tax benefits available.
• Home Equity Loan: Not applicable unless you already own a property.

Scenario 2 – Home Renovation:

• Home Equity Loan: Preferred; flexible EMIs and potential tax benefits.
• Home Loan: Not applicable unless linked to a new property purchase.

Scenario 3 – Debt Consolidation or Education:

• Home Equity Loan: Provides funds against property equity; faster processing.
• Home Loan: Cannot be used for these purposes.

Pros and Cons:

Choosing the right loan depends on financial goals, property ownership and repayment capacity. Home Loans are suited for property acquisition, whereas Home Equity Loans are optimal for leveraging existing property for other financial needs.

Also Read: Affordable Housing vs Regular Home Loan

How to Apply for a Home Equity Loan and a Home Loan in India?

Stepwise Process:

• Check Eligibility: Review income, age, credit score, and property ownership.
• Calculate Loan Amount: Use the Home Loan EMI Calculator to estimate EMIs and borrowing capacity.
• Submit Documents: KYC, income proof, property papers and bank statements.
• Loan Verification: Lender evaluates creditworthiness and property valuation.
• Sanction & Disbursement: Loan is approved digitally or via a branch; funds are credited to the account.

Tips for Faster Approval:

• Maintain a high credit score
• Ensure property papers are clear
• Submit all required documents in a single batch

Making the Right Choice Between a Home Equity Loan and a Home Loan

When it comes to choosing a Home Loan vs a Home Equity Loan, the right decision depends on your financial goals and property status. A Home Loan is best suited for purchasing or constructing a new home, offering longer tenures and attractive tax benefits. In contrast, a Home Equity Loan helps you unlock the value of your existing property to fund needs such as renovation, education or debt consolidation, with faster processing and flexible usage.

Before deciding, carefully evaluate factors like eligibility, Loan-to-Value (LTV) ratio, interest rates, repayment capacity, and available tax deductions. Using tools like a Home Loan EMI Calculator can help you compare repayment scenarios and choose wisely.

Ultimately, the choice between a Home Loan and a Home Equity Loan should align with your immediate needs and long-term plans. Explore Godrej Capital’s Home Loan and loan against property solutions for flexible terms and a seamless borrowing experience.

Apply now for a Home Loan

FAQs

Q.1. Can I refinance my existing Home Loan with a Home Equity Loan?

A. Homeowners can refinance their existing Home Loan by transferring the balance to another lender offering better terms. However, refinancing specifically with a home equity loan is not a common practice in India. Home Equity Loans are generally separate loans taken against the equity in a property, rather than used to refinance an existing Home Loan. RBI guidelines support Home Loan refinancing or balance transfer under regulated terms but do not specifically endorse refinancing by means of a Home Equity Loan.

Q.2. Is there a difference in foreclosure charges between Home Loans and Home Equity Loans in India?

A. Foreclosure charges vary by lender. Typically, Home Loans may have a prepayment penalty for floating rates, while Home Equity Loans with fixed rates often have lower or no foreclosure charges. Always confirm with the bank before repayment.

Q.3. How does the Loan-to-Value (LTV) ratio affect my borrowing capacity in both loans?

A. For Home Equity Loans, LTV is calculated as the loan amount divided by the property’s current market value, usually capped at 70–80%. For Home Loans, LTV is based on the purchase price or property value, influencing the maximum sanctioned amount.

Q.4. Can Non-Resident Indians (NRIs) avail Home Equity Loans and Home Loans in India?

A. NRIs can apply for Home Loans and certain Home Equity Loans. Eligibility requires valid income sources, property ownership documentation, and compliance with FEMA regulations.

Q.5. What are the tax implications if I use a Home Equity Loan for purposes other than home improvement?

A. Interest paid on a Home Equity Loan used for non-property purposes, such as education or debt repayment, is not eligible for tax deduction under Section 24(b). Only loans used for home renovation or improvement qualify.

Q.6. How does the credit score impact eligibility and interest rate for Home Loans vs Home Equity Loans?

A. A higher credit score (750+) increases the likelihood of approval and may reduce interest rates. Lower scores may limit the loan amount or result in higher rates. Both Home Loans and Home Equity Loans use credit history as a key eligibility criterion.

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The content presented on this page, including images and factual information, is intended solely as a summary derived from publicly available sources. GHFL/GFL (“Company”) does not claim ownership of such information, nor does it represent that the Companies have exclusive knowledge of the same. While efforts are made to ensure accuracy, there may be inadvertent errors, omissions, or delays in updating the content. Users are strongly encouraged to independently verify all information and seek expert advice where necessary. Any decisions made based on this content are solely at the discretion and responsibility of the user. Godrej Capital and its affiliates assume no responsibility for any loss or damage that may result from the use of or reliance on the information provided herein.