Wondering what to choose to finance your housing needs? You can pick between home loans as well as loans against properties. A home loan is a type of loan where a lending firm finances your new home under the condition that you would be liable to pay back the monthly EMIs. If you avail of a loan against your property, it means that you have to keep your existing property as collateral to access funds that you can use for any personal or business purposes. In this article, we dig deep into the pros and cons of availing of home loans vs loan against property to help you make an informed decision.
Pros of Availing of Home Loans
- Competitive interest rates: One of the many reasons why people avail of home loans to finance their dream home is their affordable interest rates. To get the lowest interest rates from your lending firm, you must have a stable income and excellent credit scores.
- Long repayment tenure: If you want to space out your EMI payments over a longer tenure ranging from 10 to 20 years, you can opt for home loans to buy your property. You can manage your cash flows and pay back the loan over a longer repayment period.
- Flexible repayment options: Home loans come with flexible repayment options, such as fixed or floating interest rates, pre-payment options, and loan restructuring options, making them an ideal option for many borrowers.
- Tax benefits: Under Section 80 C, you can claim tax deductions of up to INR 1.5 lakh rupees every year from your income on principal repayment. If you sell your house within the first 5 years of your possession, you cannot claim this benefit. Under Section 80 EE, you can claim up to INR 1.5 lakh rupees on the interest component over and above the existing exemption of around INR 2 lakh rupees under Section 24 (B). You can choose home loans to finance your housing dreams to avail of these benefits.
Cons of Taking Home Loans
- Prepayment penalty: Some lenders may charge a prepayment penalty if borrowers choose to repay the loan before the end of the loan tenure. Make sure to discuss prepayment penalty charges with your lender before signing the final loan agreement.
- High processing fees: Some lending firms may charge additional costs along with your loan amount, raising the overall cost of borrowing. It is best to clarify these charges and read the fine print before signing the loan agreement.
Pros of Availing of Loans Against Properties
- Low-interest rates: One of the biggest benefits of availing of a loan against your property is that they charge low-interest rates, owing to it being a secured loan. Make sure to shop around for lenders to get the most favorable loan terms.
- High loan amount: Since lending firms do not have to worry about losing their money if they are unable to repay the loan amount, they are more willing to sanction a higher loan amount.
- Can be used for a variety of purposes: While a home loan can be only used to purchase a property, you can use your loan against an existing property for any personal and business purposes.
- Tax benefits: If you plan to use your loan taken against a property to meet business expenses, you can claim tax exemption against interest paid and additional charges associated with the loan under Section 37 (1) of the Income Tax Act. Under Section 24 (B) of the Income Tax Act, you can claim a maximum deduction of up to INR 2 lakh rupees if you plan to use the funds to buy a new property.
Cons of Taking Loans Against Properties
- Risk of losing the property: The primary risk associated with taking a loan against your property is that you run the risk of losing it if you are unable to pay the monthly settlements.
- Limited liquidity: When you use your property to take funds against it, you put up one of your biggest assets as collateral. It may not be possible to sell or renovate the property until your loan is repaid.
Which is Better – Home Loans or Loans Against Properties?
It is difficult to say which is better between home loans and loans against properties since both types of loans have their own unique features and benefits. The choice between the two depends on your specific needs, financial situation, and repayment capacity.
A home loan can be used to construct a new property or to finance your move to a ready-made property. You can use a loan taken against your property to meet business operations costs or for any purpose with no end-use restrictions. When you take a home loan, the amount sanctioned is nearly 90% of the property’s market value, while when you apply for a loan against your existing property, the amount depends on the current value of your mortgage. If you take a loan against your existing house, the amount is usually 60% to 70% of the market value.
Although both types of loans offer competitive interest rates and longer repayment tenure, loans against properties tend to offer a lower interest rate, owing to it being a secured loan. Home loans come with longer repayment tenures, ranging from 15 to 30 years, whereas loans against properties come with shorter repayment tenures, ranging from 5 to 15 years. The processing costs and additional charges remain the same for both types of loans.
Home loans offer a host of tax exemptions under Sections 80C, 24, and 80EE of the Indian Income Tax Act. Loans against properties also offer a number of tax exemption benefits under Sections 24 (B) and 37 (1) of the Indian Income Tax Act which makes them a lucrative choice. However, you cannot avail of tax benefits of your interest amount if you use your LAP funds for personal purposes. Also, do not decide on a loan option solely based on tax exemptions. If you cannot comfortably repay the monthly settlements, you will not be able to enjoy the tax benefits properly as well.
Above all, evaluate your financial circumstances and be clear on why you need the loan amount. It will help you to decide what type of loan you need. You should also shop around for lenders and compare their interest rates and eligibility criteria when availing of a loan. If you have second thoughts, it is best to consult a finance professional to help you make a budget.
Whether you avail of a home loan or a loan against your property, the most important thing to keep in mind is to plan your expenses and ensure that you can repay the EMI amount comfortably. You can check your EMI amount on an online EMI calculator, like the one available on ApnaPaisa’s official website. You just have to enter the loan amount you want, the interest rate, and the tenure details. It will display the EMI amount. Ideally, you must not spend more than 60% of your income on paying EMIs. You cannot continue on a stringent budget for a long time.