Loaning is an easy and effective way to build properties, start-up new businesses, facilitate your child's foreign studies, and whatnot. But the availability of a variety of loans can leave one confused.
You can't make a wrong decision when your life's earnings are at stake. Two such terms people often confuse with are Loan Against Property and Home Loan. While they may sound the same, they are different as chalk and cheese.
So what are the significant differences between the two? Which one is right for you? Let's find out the critical differences between the two.
Loan against property(LAP) is taken to borrow money from the bank by mortgaging your owned property. Its counterpart, on the other, serves the purpose of buying a new house, land, under-construction property, and so on.
So you can use LAP to get money for your daughter's wedding, higher education, starting a new vehicle, and so on. Home Loan, though, will only be available if you're buying a new house, and you won't get an additional cash payment.
Interest rates on a mortgage loan or LAP are typically higher than the money you borrow to buy a home. An essential reason behind this is that the bank is paying you money in cash on your property in the former while it's paying only for the property in the latter.
The government has also launched several schemes like PMAY that offer further discounts on housing loans.
The loan tenure for LAP is considerably less at 20 years, while companies like PNB Housing finance offer a 50% increase up to 30 years loan tenure on housing loans. A longer tenure means you can pay the money back in smaller instalments in the latter.
Section 80C of the Income Tax Act makes you eligible for a tax deduction on a principal amount of up to Rs.1.50 lakhs. You can also avail of tax benefits on the interest you paid on your housing loan under Section 24(b).
The LAP, though, isn't directly eligible for any tax deduction. If your end purpose is business, you can claim a tax deduction on interest under Section 37(1) of ITA. But if you use the mortgaged loan to buy a new house, you would still be eligible for benefits under Section 24(b).
If your housing loan is granted, you can get up to 90% of the property's amount on loan. LAP, on the other hand, will only get you a maximum of 60% of the property's amount. That is the maximum percentage you can get, and it all depends on the bank's valuation process.
It must be clear now that you can use LAP for a variety of legal purposes, although it reaps lesser benefits. If you are looking to mortgage your old property to buy a new plot or house, it would be better instead to loan the new property as a housing loan.