A home loan is taken for the purpose of either buying a ready-to-move-in house or for the purpose of booking an under-construction property. Home loans are available for residential, as well as commercial properties. On the other hand, a loan against property is generally taken, for the purpose of raising additional funds for business. The loan against property may be obtained in two forms. It can be a pure loan, under which, a lump sum is paid to the borrower, against the security of an immovable property. Alternatively, a line of credit may be set up in the form of an overdraft facility with a set limit, based on the value of the property and repayment capacity of the borrower.
Loans against property may also be obtained for personal purposes like education or marriage in the family. A loan against property 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 defect in the title of the property being purchased. The security pledged, for taking a loan against property, may be a residential or commercial property. In case of a home loan, the property to be purchased is pledged with the lender, whereas in case of a loan against property, another property is pledged and not the house that is being purchased.
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 is for the repayment of the principal component of the home loan, which is available under Section 80 C, upto 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 public provident fund, contribution towards employee provident fund, life insurance premium, school fee for children, national savings certificates, ULIP, ELSS, etc. The other benefit is available under Section 24(b), for the interest paid on such loans. This benefit can be availed even for commercial properties and also on amounts borrowed from friends and relatives.
For a loan against property, the availability of tax benefits will depend on the ultimate use of the money borrowed. If the money is used for the purpose of your business, the interest paid and the incidental costs, like processing fee and documentation charges, can be claimed as business expenditure under Section 37(1) of the Income Tax Act. If the loan is used for personal purposes like marriage or education of your child, the interest on the same cannot be claimed under the present tax laws. If the money is used for the purpose of financing another house property, then, the same can be claimed under Section 24(b) of the Income Tax Act. The interest 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 a loan against property 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 value of the security/underlying asset. This difference that the lender retains 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 loan that a lender gives, is only upto 90 per cent of the value of the property. So, the buyer has to put in 10 per cent. For high-ticket home loans, the margin requirement can increase to 25 per cent. For loan against property, which is not covered under priority sector lending, the lenders have to keep a higher margin, which can range from 24-40 per cent of the property.
The rate of interest on home loans is generally in the range of 9-12 per cent, depending on the type of lender and the profile of the borrower. The rate of interest on loan against property, is generally higher than home loans but lower than personal loans. The rates may vary from 11-14 per cent, again depending on the type of 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.
(The author is a tax and investment expert, with 35 years’ experience)