The term home loan is often used interchangeably with the word mortgage loan, but they are not the same things. In this article, we will talk at length about the two products and they are different from each other.
What is a home loan?
In home loans, a borrower takes money from a bank to either buy a house or flat or to build a new house. You can take a home loan to renovate your existing house or for buying land as well. This type of loan is usually a secured form of loan wherein the house for which the loan is being taken is held as collateral by the lender. It is released when the entire loan is repaid in the form of monthly instalments by the borrower. If the borrower is unable to repay the loan and goes bankrupt, the lender has the right to liquidate the house to recover the pending dues.
The loan-to-value (LTV) ratio or the percentage of the amount that can be financed via a home loan is higher at around 85-90%. This is one of the key differences between home loans and mortgage loans. Also, a home loan comes with an option of both, fixed interest rate and floating interest rate. The tenor of a home loan extends up to 30 years at maximum in India. There is a processing fee as well on home loans that is usually 0.5-1% of the loan amount.
What is a mortgage loan?
Unlike a home loan, mortgage loans can be taken and used for any purpose by the borrower. However, it shares one similarity with home loans— the lender takes ownership of the property of the borrower till the repayment is complete.
The LTV ratio in mortgages is 60-70%. It means the borrower will be eligible to get only 60-70% of the collateral’s present market value as a loan. The processing fee on these loans is typically 1.5% of the loan amount, and a top-up facility is available as well. This facility allows the borrower to get additional funding on the existing loan without much paperwork. In mortgage loans, the tenor is up to 15 years. Interest rates on mortgage loans are somewhat higher (1-4%) than the interest rates offered on home loans.
Home Loan vs. mortgage loan
The table below gives a tabular difference between a home loan and a mortgage loan on some key parameters.
|Parameters||Home Loan||Mortgage Loan|
|Definition||Intended for buying a residential property or a piece of land||No restricted covenants as such on this type of loan. The borrower can use the loan amount for any purpose|
|Loan-to-value (LTV) ratio||Usually 85-90% of the current market price of the property||60-70% of the current market price of the property|
|Rate of Interest||Lower as compared to mortgage loans||1-3% higher as compared to home loans|
|Processing Fee||0.8-1.2% of the total loan amount||1.5% of the total loan amount|
|The tenor of the loan||Up to 30 years||Up to 15 years|
|Tax benefits||Offered under Section 80C, Section 24, Section 80EE, Section 80EEA,||No tax benefits|
Documents needed to get mortgage loans in India
For home loans as well as mortgage loan, the documents are more or less similar. Given below is an exhaustive list of documents that are needed while applying for a home loan or mortgage loan in India:
- ID Proof (PAN card, Aadhaar card, driving license, voter ID card)
- Address proof (Electricity bill, house tax bill, water bill, passport, or any other ID proof)
- Income proof documents
- Bank statements
- Property documents
- Income tax returns
Which is a cheaper source of financing, home loan or mortgage loan?
A home loan is cheaper if you are planning to buy a flat or a house since the interest rates on a home loan and the processing fee are lower than the interest rate and processing fee.
Is there any collateral requirement in a home loan or mortgage loan?
Yes, the property which you are planning to buy or build a new house, that property or house is the collateral in these loans.
Is a loan against property a type of mortgage loan?
Yes, a loan against property is a type of mortgage loan.