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.
See also: What are home loan spreads? How do they impact borrowers today?
Home loan vs mortgage loan
| Feature | Mortgage loan | Home loan |
| Purpose | Mortgage loans are versatile and can be used for various purposes beyond residential property, including debt consolidation, funding business ventures, covering major expenses, or investing in additional properties. They provide flexibility in how funds can be utilised, making them suitable for a wide range of financial needs. | Home loans are specifically designed for financing the purchase, construction, or renovation of residential properties. They are tailored to facilitate homeownership by providing long-term financing solutions. |
| Collateral | Mortgage loans can be secured by either residential or commercial properties, depending on the type of loan and lender requirements. This collateral serves as security for the borrowed funds, reducing the lender’s risk in case of default. | Home loans are exclusively secured by residential properties that are being purchased, constructed, or renovated. The property acts as collateral to secure the loan amount borrowed from the lender. |
| Loan-to-Value Ratio (LTV) | Typically, mortgage loans have a lower Loan-to-Value (LTV) ratio, meaning borrowers can typically borrow up to 75% of the property’s appraised value. This lower ratio reflects the higher risk associated with broader use of funds and multiple potential sources of repayment. | Home loans generally offer a higher LTV ratio, allowing borrowers to finance a larger portion (up to 80-90%) of the property’s value through the loan. This higher ratio is due to the specific purpose of financing a single residential property, reducing the risk for lenders. |
| Interest rates | Interest rates for mortgage loans are generally higher compared to home loans. This higher rate reflects the increased risk to lenders due to the broader use of funds and potential variability in repayment sources. Rates may vary based on factors such as creditworthiness, loan amount, and market conditions. | Home loans typically come with lower interest rates compared to mortgage loans. These lower rates are offered because the loan is secured against a specific residential property, reducing the lender’s risk. Interest rates can vary based on factors such as credit score, loan amount, and prevailing market rates. |
| Processing fees | Mortgage loans often incur higher processing fees compared to home loans. These fees cover the administrative costs associated with evaluating the broader use of funds, conducting property appraisals, and managing the loan disbursement process. | Home loans generally have lower processing fees as they are more straightforward in terms of purpose and collateral. These fees typically cover administrative costs related to processing the loan application, verifying property documents, and finalising the loan agreement. |
| Repayment tenure | Repayment terms for mortgage loans are typically shorter, ranging up to 15 years. The shorter tenure reflects the higher risk profile associated with the loan’s flexibility and varied use of funds, requiring more immediate repayment. | Home loans offer longer repayment tenures, often extending up to 30 years or more. This extended tenure allows borrowers to spread out repayments over a longer period, making homeownership more affordable and manageable. |
| Prepayment penalties | Mortgage loans may or may not include prepayment penalties, depending on the lender and loan terms. These penalties discourage borrowers from paying off the loan early and compensate lenders for potential interest income loss. | Home loans also may or may not include prepayment penalties, but they are less common compared to mortgage loans. Borrowers should review loan terms carefully to understand any penalties associated with early repayment and consider their impact on overall loan cost. |
| Flexibility | Mortgage loans offer greater flexibility in how funds can be used, allowing borrowers to allocate resources to various financial needs beyond residential property. This flexibility appeals to borrowers seeking diverse financial strategies and investment opportunities. | Home loans are less flexible in use, as funds must be dedicated exclusively to purchasing, constructing, or renovating a residential property. This focused purpose ensures that borrowed funds directly contribute to homeownership goals and property investment. |
Documents needed to get mortgage loans in India
For home loans as well as mortgage loans, 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
FAQs
Home loans generally come with lower interest rates compared to mortgage loans due to the lower risk for lenders.
Both loans require a down payment, but home loans often allow for a smaller down payment with a higher Loan-to-Value (LTV) ratio.
Home loans typically have longer repayment terms, stretching up to 30 years in some cases, while mortgage loans are usually shorter, often capped at 15 years.
Both loans may involve processing fees. It's important to compare rates and fees from different lenders. Which loan typically has a lower interest rate?
Are there any down payment requirements?
How long do I have to repay the loan?
Is there any fee involved in acquiring the loans?
| Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at jhumur.ghosh1@housing.com |
