Home loan versus loan against property: When it comes to raising money, should a borrower opt for a loan against property or a home loan?
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5 February 2019 - 14:00, by , in Current News, No comments

Aim

A home loan is taken for either buying a ready-to-move-in house or to book an under-construction home. House loans are available for residential, as well as commercial properties. On the other hand, a credit against property is generally taken, to raise additional funds for business. The loan against property may be obtained in two forms. It can be a real loan, under which, a lump sum is paid to the borrower, against the security of immovable property. Alternatively, a line of credit maybe in the shape of overdraft amity with a defined limit, based on the cost of the property & repayment ability of the borrower.

Loans against property may also be obtained for personal purposes like education or marriage in the family. A credit against the house can also be availed, to finance the purchase of another property, in case it is not possible to get a home loan against the property, due to any technical reasons like the defect in the title of the property being purchased. The security pledged, for taking a credit against property, maybe a commercial/residential property. In case of a home loan, the property to be purchased is guaranteed with the lender, whereas in fact of a credit against property, another feature is pledged and not the house that is being bought.

Tax benefits of home loans and loan against property

For home loans taken to buy a residential house property, the borrower can claim twin tax benefits under the income tax laws. The first benefits are for the repayment of the principal component of the home loan, which is available under Section 80 C, up to Rs 1.50 lakhs for all the residential properties taken together. This deduction of Rs 1.50 lakhs is available along with other eligible items like the PPF, contribution towards life insurance premium, employee provident fund, school fee for national savings certificates, children, ELSS, ULIP etc. The other benefit is available under Section 24(b), for the interest paid on such loans. This benefit can be acquired even for commercial properties and also on value borrowed from relatives and friends.

For a loan against house, the availability of tax benefits will depend on the usage of the money borrowed. If the money is used for your business, the interest paid & the incidental costs, like documentation charges and processing fee, can be claimed as business expenditure under Section 37(1) of the Income Tax Act. If the money is used for financing another house property, then, the same can be argued under Section 24(b) of the ITA. The new claim would be allowed, only if you are conclusively able to establish the link between the money borrowed and its ultimate use.

However, you cannot claim any benefit for the principal repayment on loan against house that is taken to finance another house, as the money borrowed cannot be treated as a home loan.

 

Margin requirements and rate of interest for home loans and loan against property

To safeguard themselves against a decline in the market value of the asset, lenders do not lend the full amount of the security/underlying asset. This difference that the lender remains while lending, is called the margin. The margin money in the case of a home loan is the money that the borrower is supposed to finance on his own. The margin requirement for home loans is generally regulated by the Reserve Bank of India, in the case of banks and by the National Housing Bank, in the case of housing finance companies. The margin money also depends on the amount of home loan availed. The maximum credit that a lender gives is only up to 90 percent of the cost of the property. So, the buyer has to put in 10 percent. For high-ticket home loans, the margin requirement can increase to 25 percent. For loan against house, which is not covered under priority sector lending, the lenders have to keep a higher margin, which can range from 24-40 percent of the property.

The rate of interest on house loans is generally in the range of 9-12 percent, depending on the lender and the profile of the borrower. The percentage of interest on loan against property is generally higher than home loans but lower than personal loans. The prices may vary from 11-14 percent, again depending on the lender and profile of the borrower.

Hence, a home loan is the best option, for persons who want to buy a readymade house or book an under-construction property. However, in case you have any title defect in the property to be purchased, you can finance the same by way of a loan against your existing property.

See Also: Is GST applicable on properties booked before the introduction of GST

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