Buying a Home or Need Funds? Know How Home Loan and Loan Against Property Differ

Owning property is a step towards security and opportunity. Being a property owner not only gives you a feeling of stability but can also help you raise money when you need it most. Many people think of loans only when buying a home, but property can also be used to meet other financial needs. Banks offer two main types of property-related loans, a Home Loan and a Loan Against Property (LAP). While both involve property, their purposes are very different. Understanding these differences helps you make the right financial choice.

What is a Loan Against Property? 

A Loan Against Property (LAP) is a type of secured loan. This means you give your existing property, residential, commercial, or industrial, as collateral to the bank. The bank then lends you a certain amount based on your property’s market value and your ability to repay. People usually take a Loan Against Property for:

• Expanding a business or managing working capital
• Paying for education or weddings
• Consolidating debt
• Handling medical or emergency expenses

Because the loan is backed by a real asset, interest rates on LAPs are generally lower than unsecured loans, such as personal loans.

What is a Home Loan? 

A Home Loan helps you buy, build, or improve a house. The property you purchase or construct with the loan is kept as security by the bank until the full repayment is made. You can use a Home Loan for:

• Buying a new or resale residential property
• Constructing a home on your own land
• Extending or renovating your existing home

Several banks offer long repayment periods, attractive interest rates and flexible EMI options, making it easier to own your dream home.

Main differences between Loan Against Property and Home Loan Although both loans are linked to property, they serve different needs. Let’s look at the major points of difference:

1. Purpose of the loan

Loan Against Property: You can use the money for almost any purpose, personal or business. Whether it’s for education, health, or expanding a company, there are no usage restrictions.

Home Loan: The funds must be used only for property-related purposes, like buying, constructing, or renovating a home.

2. Property type accepted

Loan Against Property: You can pledge residential, commercial, or industrial property. Both self-occupied and rented-out properties are eligible.

Home Loan: These loans are given only for residential properties that are being bought or built.

3. Loan-to-Value (LTV) ratio

Loan Against Property: Banks usually lend up to 75% of the property’s value. The percentage can change depending on your profile and the property’s condition or location.

Home Loan: Home Loans can have a higher LTV ratio, usually 80-90%, as their purpose is to help you acquire property.

4. Loan tenure

Loan Against Property: The repayment period is generally up to 15 years.

Home Loan: The tenure can go up to 30 years, offering smaller monthly instalments and easier long-term planning.

5. Loan amount

Loan Against Property: The loan amount depends on the market value of the pledged property and your repayment capacity.

Home Loan: The amount depends on the cost of the property being purchased or constructed.

6. Tax benefits

Loan Against Property: Usually, there are no tax benefits. However, if you use the funds for business purposes, the interest paid can sometimes be claimed as a business expense.

Home Loan: Offers strong tax advantages. Under the Income Tax Act, borrowers can claim deductions for both:

• Principal repayment (Section 80C)
• Interest payment (Section 24b)

7. Documentation needed 

The documents required for both loans differ slightly: 

Loan Against Property documents

• Identity and address proof (PAN, Aadhaar, Passport, or Voter ID)
• Income proof (salary slips, bank statements, ITR)
• Property ownership documents (title deed, sale agreement, or NOC)
• Property valuation report
• Latest property tax receipts

For business owners, banks may also ask for financial statements or GST returns. 

Home Loan documents

• Identity and residence proof
• Income proof
• Property papers for the property being purchased or built
• Approved building plan or allotment letter
• Agreement for sale or builder’s invoice

8. Processing time

Loan Against Property: Processing takes a bit longer as the bank must verify the property’s ownership, title, and market value.

Home Loan: Often processed faster, especially when you are buying from a builder already approved by the bank.

9. Risk factor

Loan Against Property: Since you mortgage your existing property, failure to repay could lead to loss of ownership. However, you can continue to live or use the property (if it’s self-occupied) while repaying.

Home Loan: The new home itself acts as the security. You gain full ownership only after the entire loan is repaid.

Which one should you choose? 

Your choice depends on your goal:

• Choose a Home Loan if you want to buy, build, or renovate a home.
• Choose a Loan Against Property if you already own property and need funds for other personal or business purposes.

You can use online tools such as loan eligibility calculators and EMI calculators to estimate your loan amount and repayment plan before applying.

Both Home Loans and Loans Against Property are valuable financial tools but they serve very different purposes. A Home Loan helps you invest in your dream home, while a Loan Against Property lets you unlock the value of your existing property to meet urgent financial needs.

By comparing interest rates, tenures, and documentation, you can decide which option fits your financial plans better. Choosing the right product and a trusted bank ensures that you reach your goals smoothly and without stress.

Disclaimer: The above article is for the purpose of information, contact your nearby banks for expert advice.