Loan Against Property vs. Home Loan: Difference Explained

Buying a property or unlocking its value through financing are two major reasons why people approach lenders. Two of the most availed property-related loans are the home loan and the loan against property (LAP). Although both loans are secured against property, they serve very different purposes and come with distinct eligibility, interest rates, tax benefits, and repayment terms.

If you are confused between the two, this guide explains the key differences between a home loan and a loan against property, helping you choose the right product based on your needs.

What Is a Home Loan?

A home loan is a type of secured loan offered by financial services like NBFCs to help individuals buy, construct or renovate residential property. This type of loan is mostly used for purchasing a new flat or house, constructing a home on your own land, buying a resale property and home extension or improvements.

In a home loan, the property being purchased is the collateral for the loan. You repay the loan in EMIs over a tenure that can go up to 30 years.

Also Read: Commonly Used Home Loan Teriminologies

What Is a Loan Against Property (LAP)?

A Loan Against Property (LAP) is also a secured loan, but the funds can be used for any personal or business purpose, and not necessarily for buying property. This type of loan is commonly used for business expansion or working capital, higher education expenses, weddings or emergencies, debt consolidation and personal financial needs.

In LAP, you mortgage an existing residential, commercial or even industrial property to avail funds. Additionally, the property is used as a security, but the end-use is flexible, unlike a home loan.

Also Read: All About Loan Against Property: You Asked, We Answered

Key Differences Between Loan Against Property and Home Loan

The most obvious difference lies in the intent of borrowing. Home loans are taken to buy or construct a home, and the use of the funds is restricted to residential property-related expenses. On the other hand, LAP is taken by mortgaging an existing property and the borrower is free to use the funds for any financial need.

Interest rates for home loans are usually lower because they are tied to the acquisition of a new property, a relatively safer investment from the lender's point of view. LAPs tend to carry slightly higher interest rates since the funds can be used for various purposes not necessarily backed by a tangible asset like a home.

When it comes to loan tenure, home loans can be repaid over longer durations, going up to 30 years. LAPs typically offer shorter repayment windows, ranging from 10 to 15 years.

Tax benefits are a major factor. Home loans come with benefits under Section 80C and Section 24(b) of the Income Tax Act, allowing deductions on both principal and interest repayment. LAP does not offer any tax benefit unless the funds are used for business purposes.

Processing time and documentation can vary. Home loans, especially for salaried individuals, are pre-approved and have streamlined processes. LAP requires a detailed valuation of the pledged property and more extensive documentation, which can result in longer approval times.

When Should You Choose a Home Loan?

You should choose a home loan if:

• You are buying, constructing, or renovating a home
• You want to claim tax benefits under 80C and 24(b)
• You need a higher LTV and longer repayment tenure
• You are eligible for PMAY or other government subsidies

When Should You Opt for a LAP?

You should consider LAP if:

• You own a property and need a large sum of money
• You need funds for business, education, or emergency use
• You do not want to liquidate investments or savings
• You are not eligible for unsecured personal or business loans

Use a Loan Calculator Before You Decide

Whether you are opting for a home loan or a LAP, using an online EMI calculator helps you plan your repayment efficiently. Many financial services now offer home loan EMI calculator and LAP EMI calculator, which shows you how much your EMI will be based on the loan amount, interest rate, and tenure. Comparing both types of loans gives you clarity on what fits your budget and long-term financial goals.

Final Thoughts

While both home loans and LAP are secured loans backed by real estate, the difference lies in their purpose, cost, tenure, and benefits. A home loan helps you build or buy your dream home with added tax advantages. LAP unlocks the value of an existing asset for flexible usage.

Choosing between them depends on your financial goal, repayment capacity, and urgency of funds. Always compare lenders, read the fine print, and ensure you borrow within your means.

FAQs

Q.1. What is the main difference between a home loan and a loan against property?

A. The main difference lies in the purpose. A home loan is used to buy, build, or renovate a residential property, while LAP allows you to borrow funds against your existing property for any personal or business use.

Q.2. Which one offers a lower interest rate: home loan or LAP?

A. Generally, home loans have lower interest rates compared to LAP. This is because home loans are considered less risky by lenders since they are tied to property acquisition.

Q.3. Can I get tax benefits on both home loan and LAP?

A. Tax benefits are available for home loans under Sections 80C and 24(b). Loans against property do not offer tax benefits unless the loan is used for business purposes, in which case the interest paid can be claimed as a business expense.

Q.4. Is there a difference in the loan amount I can get?

A. Yes. In home loans, lenders may offer up to 90% of the property’s value. In LAP, the loan amount typically ranges from 60% to 75% of the property's current market value.

Q.5. Which loan is better for business needs?

A. A loan against property is better suited for business needs since it offers large loan amounts and the end-use of the funds is flexible.

Disclaimer:

The contents of this article are for information purposes only and not a financial advisory. The information is subject to update, revision, and amendment and may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Godrej Capital or its Affiliates to any requirements. Godrej Capital or its Affiliates shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any decisions, financial or otherwise based on the contents and information mentioned. For more information, please visit www.godrejcapital.com