Getting financial help to buy or build a home is a big step. Home loans and mortgage loans are common choices, each with its own features. In this article, we will break down the main differences between these two types of loans, focusing on things like collateral, interest rates, tenure, Loan to Value Ratio (LTV), and processing fees.
Collateral and how you can use the money
A home loan is for people who want to buy or build a house. The property you’re getting serves as collateral, and the money you get can only be used for buying, building, or renovating that property. On the other hand, a mortgage loan, also known as a Loan Against Property (LAP), lets you use different things as collateral, like your house, gold, or securities. The important thing is, there are no strict rules on how you use the money with a mortgage loan – you can use it for anything, be it personal or business needs.
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Interest rates
When it comes to interest rates, there’s a difference between home loans and mortgage loans. Home loans usually have interest rates calculated as RBI‘s repo rate plus a little extra. Mortgage loans, however, often have higher interest rates – about 1-3% more than home loans. This higher rate shows that banks see mortgage loans as a bit riskier.
Tenure
How long you take to repay the loan is another difference. If you go for a home loan, you can choose a longer repayment time, up to 30 years. This makes your monthly payments lower, but you’ll end up paying more interest overall. With mortgage loans, the repayment time is usually shorter, capped at 15 years. So, your monthly payments are higher, but you pay less interest in the end.
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Loan to Value Ratio (LTV)
This is about how much loan the bank gives compared to the property’s value. Home Loans often give a higher percentage, sometimes up to 90% of the property’s value. But for mortgage loans, it’s usually capped at 60-70%. So, if your property is worth the same, you might get more money with a home loan.
Processing Fee
Lastly, let’s talk about the cost of getting a loan. Home loans usually have a lower processing fee, around 0.8-1.2% of the loan amount. But for mortgage loans, the processing fee can be higher, maybe around 1.5%. This is because banks think mortgage loans are a bit more complicated and risky.
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Conclusion
So, whether you go for a home loan with some rules but lower costs or a mortgage loan with more flexibility but slightly higher expenses, it’s important to think about what suits your needs and plans. Understanding these differences can help you make a smart decision when it comes to buying or building your dream home.
