Home loan vs mortgage loan: Which one should you choose?

Home loans and mortgage loans are the most commonly discussed options when financing significant purchases or investments. Although they are often used interchangeably, there are distinct differences between these two types of loans that borrowers should understand to make informed financial decisions.

This article explores the key differences, benefits, and considerations for home and mortgage loans tailored to meet the needs of individuals navigating the Indian financial landscape.

 

Understanding home loans

Definition: A home loan is a financial product banks and financial institutions offer to help individuals purchase or construct a residential property. It is secured against the purchased property, meaning the lender holds it as collateral until the loan is fully repaid.

 

Key features of home loans:

1. Purpose: Home loans are specifically designed for purchasing ready-to-move-in properties, under-construction properties, or for constructing a house on a plot of land.

2. Loan tenure: The tenure of home loans typically ranges from 10 to 30 years, allowing borrowers to spread their repayment over an extended period.

3. Interest rates:
   • Fixed interest rates: The rate remains constant throughout the loan tenure.

   • Floating interest rates: The rate fluctuates based on changes in the Reserve Bank of India’s (RBI) policies or market conditions.

4. Eligibility criteria: Factors like age, income, credit score, employment type, and property valuation play a significant role in determining eligibility.

5. Tax benefits:
   • Under Section 80C of the Income Tax Act, borrowers can claim deductions of up to ₹1.5 lakh on principal repayment.

   • Under Section 24(b), interest paid on home loans qualifies for deductions of up to ₹2 lakh per annum for a self-occupied property.

 

Understanding mortgage loans

Definition: A mortgage loan is a broader term encompassing loans secured by any immovable asset, such as residential or commercial properties, used as collateral. Unlike home loans, mortgage loans are not limited to property purchases and can be used for various purposes, including business expansion, education, or personal needs.

 

Key features of mortgage loans:

1. Purpose: Mortgage loans are versatile and can be used for various financial requirements.

2. Loan tenure: The tenure is generally shorter than home loans, usually 5 to 20 years.

3. Interest rates:
   • Typically higher than home loans due to their broader application and perceived risk.

4. Eligibility criteria: The borrower’s repayment capacity, income stability, and property valuation are crucial factors.

5. Tax benefits: Mortgage loans do not typically offer tax benefits unless the loan amount is used for specific purposes, such as constructing or renovating a property.

 

Difference between home loan and mortgage loan

Understanding the distinctions between home and mortgage loans is essential for making informed financial decisions. Here’s an in-depth comparison tailored to the Indian financial landscape:

1. Purpose

• Home loans: Explicitly designed for acquiring, constructing, or renovating residential properties. The funds are restricted to housing-related expenses, ensuring borrowers utilise the loan solely for residential purposes.

• Mortgage loans: These are versatile financial instruments, also known as loans against property. Borrowers can use the funds for various needs, including business expansion, education, medical emergencies, or other personal expenses. The end-use flexibility makes mortgage loans suitable for a broader range of financial requirements.

 

2. Loan amount (Loan-to-value ratio – LTV)

• Home loans: Lenders typically offer up to 80-90% of the property’s market value as the loan amount. This higher LTV ratio reflects the lender’s confidence in the property’s value and the borrower’s intent to use the funds for housing purposes.

• Mortgage loans: The LTV ratio is generally lower, ranging from 60-70% of the property’s value. This conservative approach accounts for the varied end-use of funds and the associated risks.

 

3. Tenure

• Home loans: Offer longer repayment periods, often extending up to 30 years. This extended tenure allows borrowers to manage their monthly instalments more comfortably, making homeownership more accessible.
  
  Mortgage loans: Feature shorter tenures, typically up to 15 years. The reduced repayment period increases monthly instalments but ensures quicker loan closure.

4. Interest rates

• Home loans: Generally come with lower interest rates, as housing finance is often supported by government policies promoting homeownership. These rates can be fixed or floating, depending on the lender’s terms and the borrower’s preference.

• Mortgage loans: Tend to have slightly higher interest rates, reflecting the increased risk associated with the unrestricted use of funds. The rates may vary based on the lender’s assessment of the borrower’s creditworthiness and the property’s value.

 

5. Tax benefits

• Home loans: Borrowers can avail of significant tax deductions under the Income Tax Act. Section 80C allows a deduction on principal repayment, while Section 24(b) permits a deduction on interest paid, making home loans tax-efficient.

• Mortgage loans: Tax benefits are limited and conditional. If the loan amount is utilised for business purposes, the interest paid may be claimed as a business expense under Section 37(1) of the Income Tax Act. However, personal use does not typically qualify for tax deductions.

 

6. Risk to property

• Home loans: The property being purchased serves as collateral. In default, the lender has the legal right to initiate foreclosure proceedings to recover the outstanding loan amount. This underscores the importance of timely repayments to safeguard ownership.

• Mortgage loans: Existing property owned by the borrower is pledged as security. Failure to meet repayment obligations can lead to the lender seizing and selling the property to recoup losses. Borrowers must assess their repayment capacity before opting for such loans.

 

Additional considerations

• Processing fees: Home loans often have lower processing fees, ranging from 0.8-1.2% of the loan amount, while mortgage loans may attract higher fees, approximately 1.5%. These charges can impact the overall cost of borrowing and should be factored into financial planning.

• Prepayment charges: Many lenders do not levy prepayment penalties for home loans with floating interest rates, offering flexibility to borrowers wishing to repay earlier. In contrast, mortgage loans may have prepayment charges, especially on fixed interest rates. It’s advisable to review the loan agreement for any such clauses.

 

Benefits of home loans

1. Affordable interest rates: Banks and housing finance companies offer lower rates to encourage home ownership.

2. Flexible repayment options: Borrowers can choose from different repayment plans based on financial stability.

3. Subsidies and government schemes: Under initiatives like the Pradhan Mantri Awas Yojana (PMAY), eligible borrowers can avail themselves of subsidies on interest rates.

4. Tax deductions: Significant savings through tax benefits make home loans financially attractive.

5. Long tenure: Allows manageable EMIs (Equated Monthly Installments) even for large loan amounts.

 

Benefits of mortgage loans

1. Flexible usage: Funds can be used for any purpose, from business expansion to personal needs.

2. Quick approval: Minimal restrictions on usage often lead to faster approvals.

3. Leverage property value: Unlock the monetary value of an owned property without selling it.

4. Higher loan amounts: Borrowers can secure large loan amounts depending on the property’s value.

5. Shorter tenure: Allows quicker repayment and reduces the long-term financial burden.

 

Considerations before choosing between home and mortgage loans

When deciding between a home loan and a mortgage loan, evaluating several factors is essential to ensure alignment with your financial objectives and capabilities. Here’s a comprehensive guide to assist you in making an informed choice:

 

1. Financial goals and purpose

• Home loan: Ideal for individuals who purchase, construct, or renovate a residential property. The funds are earmarked exclusively for housing-related expenditures.

• Mortgage loan: Suitable for various financial needs beyond property acquisition, such as funding education, medical emergencies, business expansion, or other personal expenses. This loan offers flexibility in fund utilisation.

 

2. Loan tenure and equated monthly installments (EMIs)

• Home loan: Typically offers longer repayment periods, up to 30 years. This extended tenure can lower EMIs, easing the monthly financial burden.

• Mortgage loan: Generally comes with shorter tenures, often up to 15 years, leading to higher EMIs. Assessing your monthly repayment capacity is crucial to ensure it aligns with your income and expenses.

 

3. Interest rate comparison

• Home loan: Usually associated with lower interest rates, as government initiatives often support these loans to promote homeownership. Lenders may offer both fixed and floating interest rate options.

• Mortgage loan: Tends to attract higher interest rates due to the broader scope of fund utilisation and perceived risk. Comparing interest rates across lenders and understanding the implications of fixed versus floating rates is essential for cost-effective borrowing.

 

4. Tax implications

• Home loan: Offers significant tax benefits. Under Section 80C of the Income Tax Act, you can claim deductions on principal repayments, and under Section 24(b), deductions on interest payments are permissible, reducing overall tax liability.

• Mortgage loan: Tax benefits are limited and conditional. If the loan is utilised for business purposes, the interest paid may be deductible as a business expense under Section 37(1). However, personal use does not typically qualify for tax deductions.

 

5. Collateral and associated risks

• Home loan: The property being purchased serves as collateral. In case of default, the lender has the right to seize the property through foreclosure. It’s imperative to ensure that the property is not indispensable to your financial stability and to maintain consistent repayments to safeguard ownership.

• Mortgage loan: An existing property is pledged as security. Failure to meet repayment obligations can lead to the lender taking possession of the collateralised property. Evaluate the importance of the property in your financial portfolio and the potential impact of its loss before proceeding.

 

6. Eligibility criteria

• Home loan: Lenders assess credit score, income stability, employment history, age, and existing liabilities. A higher credit score and stable income enhance approval chances and may secure more favourable terms.

• Mortgage loan: While similar eligibility criteria apply, lenders may place additional emphasis on the value and condition of the property offered as collateral. Ensuring clear property titles and meeting lender-specific requirements is crucial to avoid rejection.

 

When deciding between home and mortgage loans, it’s helpful to consider real-life scenarios that illustrate their practical applications. Here are everyday situations where each type of loan might be appropriate:

 

Common scenarios for opting for home loans

1. First-time home buyers: Consider Rajesh, a young professional in Bengaluru who dreams of owning his first apartment. With property prices soaring, accumulating the entire amount seems daunting. A home loan becomes a viable solution, allowing him to purchase the property and repay the loan over time. Additionally, he benefits from tax deductions on both principal and interest repayments, easing his financial burden.

2. Property construction: Imagine Sunita, who owns a plot of land in her hometown and wishes to build a house. Home construction loans are tailored for such needs, providing funds in phases as the construction progresses. This ensures she has the necessary capital at each stage, from laying the foundation to completing the structure.

3. Upgrading homes: The Sharma family, residing in a modest flat, plans to move to a more spacious apartment in a better locality due to their growing needs. A home loan facilitates this transition by covering the cost difference between selling their current property and purchasing a new one, enabling them to upgrade without significant financial strain.

 

Common scenarios for opting for mortgage loans

1. Business needs: Anita, an entrepreneur in Delhi, seeks to expand her boutique business but lacks sufficient capital. She owns a residential property, which she can use as collateral for a mortgage loan. This loan provides the necessary funds for business expansion at relatively lower interest rates than unsecured loans.

2. Debt consolidation: Vikram has multiple high-interest debts, including credit card dues and personal loans. Managing various repayments is becoming overwhelming. By opting for a mortgage loan against his property, he consolidates these debts into a single loan with a more manageable interest rate and repayment schedule, simplifying his financial obligations.

3. Emergency expenses: The Patil family faces unexpected medical expenses due to a health emergency. Lacking sufficient liquid funds, they turn to a mortgage loan, using their property as collateral. This promptly provides them with the necessary funds, ensuring timely medical treatment without compromising their financial stability.

 

Steps to apply for home or mortgage loans

1. Research and compare: Compare interest rates, processing fees, and terms different banks or NBFCs offer.

2. Eligibility check: Use online calculators to assess eligibility based on income, credit score, and loan amount.

3. Prepare documents: Documents include identity proof, address proof, income proof, property documents, and bank statements.

4. Loan application: Fill out the application form and submit it with the required documents.

5. Verification and approval: The lender verifies documents and assesses the property before approving the loan.

6. Loan disbursement: Upon approval, the loan amount is disbursed to the borrower’s account or directly to the seller/developer.

 

Housing.com POV

Understanding the differences between home and mortgage loans is crucial for making the right financial decision. While home loans are purpose-specific and come with significant tax benefits, mortgage loans offer flexibility for various financial needs. Evaluate your financial goals, repayment capacity, and property value before choosing the best loan option.

In India’s evolving financial landscape, home loans and mortgage loans empower individuals and businesses to achieve their goals efficiently. Choose wisely to align with your long-term economic stability and aspirations.

 

FAQs

What is the primary difference between home and mortgage loans?

A home loan is specifically designed for purchasing, constructing, or renovating residential properties and comes with tax benefits under Sections 80C and 24(b). On the other hand, a mortgage loan is secured against any immovable property and can be used for various financial needs such as business expansion, medical emergencies, or education.

Can I use a home loan for purposes other than buying or constructing a house?

No, home loans are strictly meant for property-related expenses like purchasing, constructing, or renovating a residential property. A mortgage loan would be a better fit if you need funds for other purposes, such as a child’s education or consolidating debts.

Which loan type offers better tax benefits?

Home loans offer substantial tax benefits under the Income Tax Act:
• Section 80C: Up to ₹1.5 lakh on principal repayment.
• Section 24(b): Up to ₹2 lakh on interest repayment for self-occupied properties.
Mortgage loans, however, provide limited tax benefits only if the loan amount is used for specific purposes like property construction or renovation.

What should I consider when deciding between a home loan and a mortgage loan?

When choosing between the two, consider:
• Purpose: Home loans for property purchase or construction; mortgage loans for versatile financial needs.
• Tenure: Home loans offer up to 30 years, while mortgage loans typically have shorter tenures.
• Interest rates: Home loans generally have lower rates, supported by government incentives, whereas mortgage loans attract higher rates due to their broader application.

Can I get a mortgage loan if I already have a home loan?

Yes, you can use a mortgage loan if you have an existing home loan, provided your financial profile and the property’s value meets the lender’s eligibility criteria. Mortgage loans allow you to leverage your property’s equity without affecting your ongoing home loan.

What happens if I fail to repay my home or mortgage loan?

In both cases, the property used as collateral is at risk.
• Home loan: The lender can foreclose on the property being purchased.
• Mortgage loan: The lender can seize and sell the pledged property to recover dues.
Timely repayment is crucial to avoid losing the collateralised property.