You may have heard the terms home loan and mortgage loan in relation to property matters. While both of them refer to loans that are connected to property, their nature and purpose are quite different. The end-use of the money you receive is the deciding factor when it comes to the type of loan you choose. Every loan is based on the terms and conditions that govern it, and it usually falls into different categories based on your own expectations and goals.
That is why it’s essential to know the terms well, and understand exactly what they mean. This will help you to select the right one according to your circumstances, needs and preferences.
When you want to purchase a home, you may not always have the ready funds available. In earlier days, most salaried people constructed their homes towards the end of their career, with their retirement funds and savings. Loans were not easily available, nor were they secure and affordable. Today, the landscape has changed dramatically. Younger people prefer to purchase their own homes as soon as their careers are set on a stable trajectory. Banks, non-banking finance companies and housing finance companies offer a variety of home loan and mortgage packages that are tailored to meet your specifications.
What Is A Home Loan?
Home loans are available to purchase, improve or construct a residential property by offering it as a collateral or security against repayment. You can get a high-value loan with different tenures and home loan interest rates. Repayment is through EMI (equated monthly installment). Once the full repayment plus interest and other charges are completed, the property title deeds are returned to the owner. Interest rates may be fixed, floating or hybrid. The eligibility criteria vary across different lenders.
What Is A Mortgage Loan?
Mortgage loans are usually availed of when you already own the residential or commercial property. It can also be taken against machinery, equipment etc. These loans are also known as Loans Against Property. The property is pledged to the lender and the titled is returned only after full repayment. You can use the funds that you borrow for any purpose. Mortgage loan interest rates are usually higher and the tenure may be shorter than a typical home loan. This is essentially an agreement between lender and borrower where the lender can take over the property in case of default or non-repayment.
There are different types of mortgages:
- Simple
- Usufructuary
- English
- Sub mortgage
In each of these, there are different interest rates, terms of possession of collateral, and whether the mortgaged property can be transferred to the lender or sold to meet the repayment.
Know The Difference
It’s important to do your own research before you set out to apply for a home loan or mortgage loan. This will help you to make a more informed choice and select the right type to sync with your end goals.
Purpose: The main difference is the end purpose of each. In home loans, the loan is disbursed specifically to purchase a residential property either a ready-to-move in one, to construct one, improve it, or to buy land on which to construct a residence. There is no such restriction on mortgage loans. You can use the funds for any purpose, either personal or business.
Security: Collateral in the home loan is the property itself. The lender keeps custody of the title deeds and in many cases, the loan amounts are disbursed directly to the builder or seller of the property. With mortgage loans, collateral could be any high value property, machinery, equipment etc.
Ratio of Loan Value: In home loans, the LTV (loan to value ratio) can go up to 90% of the property’s market value. On the other hand, if you’re availing of a mortgage loan, the LTV is only between 60-70%.
Interest Rates: The interest rate charged on home loans is linked to the RBI repo rate plus spread. Mortgage loans are available at a higher rate of interest.
Tenure: Typically, home loans can be extended to about 30 years, based on eligibility factors, but mortgage loans have a shorter tenure, going up to a maximum of 18 years.
Disbursement and Processing: In general, if all the eligibility criteria are fulfilled, home loans can be disbursed within 48 hours. Mortgage loans take at least 72 hours from the time of final approval to be disbursed. Processing fees for home loans are lower than those for mortgage loans.
Tax Benefits: You can claim exemption for up to 1.5 and 2 lakhs every financial year for home loans under Sections 80C and 24 for principal repayments and basis interest repayment respectively for home loans. If you use mortgage loan funds for personal purposes, there are no tax benefits.
If you have a good credit score, fulfill the eligibility criteria, and have an excellent working relationship with your bank or housing finance company, there is some room for negotiation. You may be able to work out a mutually agreed upon set of terms that will suit you and your lender.