Should I go for a Home Loan or a Mortgage Loan? What is the difference between the two?
Home loans are given to purchase or construct a house; Mortgage loans, also known as ‘Loan Against Property’ are taken by pledging your property as collateral.
A House or any Real Estate is considered to be a time-tested investment in India. It wouldn’t be an exaggeration to say that every earning individual’s primary goal is to own a house. But not everybody can pay the entire amount upfront to buy one; which is why we go for ‘Home Loans’.
Home loans come with very low-interest rates so they are quite affordable to a major segment of customers. The long tenure of 30 years provides a comfortable repayment option to the borrowers.
Mortgage loans, on the other hand, are taken in times of financial crises or emergencies. When a person is faced with unexpected exigencies, they would go for personal loans or use their credit cards. But if the required amount is very large, personal loans may not be the best option. That is when your house or property helps you. You can pledge them as security and get mortgage loans since the amount can be used for any purpose.
In layman terms, a ‘Home Loan’ is to buy a new house and a ‘Mortgage Loan’ is taken on the house to meet other needs.
Key Differences Between Home Loan And Mortgage Loans
|Home loan||Mortgage loan|
|Purpose||Can be taken only for the construction or purchase of a house||There are no restrictions on the end use. It can be utilized to fulfill personal as well as professional needs.|
|Loan Amount||You can get up to 90% of the property’s market value||You are usually offered 60% to 70% of the property’s market value|
|Interest rate||Has one of the lowest interest rate; starts at 6.5% and go up to 14%||Slightly higher than home loan interest rates; starts at 10% and goes up top 18%|
|Processing fees||Also low, somewhere between 0.5 – 2%||Low too; at around 1.5 – 3%|
|Repayment tenure||You can get up to 30 years to repay the loan||Maximum of up to 15 years only|
Also Read: The Credit Mantri Guide To Home Loans
How To Decide Which One Is Better? Home Loan Or Mortgage Loan?
An important point to be noted here is that the home loans and mortgage loans are pretty different. Their purposes differ greatly. So the decision on which one to get solely depends on your end use.
If you are buying a new house, then the home loan is the obvious choice. If you need money for any other purpose, like starting a new business, paying for medical emergencies, for your kid’s higher education, or any other personal need, then a mortgage loan seems to be the best choice.
Here are some pointers to help you in your decision-making process:
- Home loans are of different types; Term loans, home construction loans, plot loans, home renovation loans, top-up home loans and more. However, these loans are primarily offered to buy or construct a house
- Mortgage loans are usually taken for other purposes. You can use them like personal loans for personal or business purposes
- A home loan top-up is similar to a mortgage loan and allows you to use the loan money for any purpose and you get the advantage of the low- interest rate of the home loan
- Home loan amounts are relatively higher, as they are based on your income while mortgage loan amounts are based on the value of the property. So if you need a huge loan amount, you need to ensure that your property value is proportionate to that.
An important aspect of a home loan is Tax Exemption. No other loan product enjoys tax benefits. Home loan interest is paid and a part of the principal amount gets tax exemption every year. Such an exemption is not available for a mortgage loan or personal loan.
As per the latest regulations, lenders cannot charge prepayment charges on loans with floating rates of interest. Home loans generally come with floating rates of interest. If mortgage loans also offer you floating rates of interest, you will be benefitted.
To sum it up, a home loan is the best option if you are looking to purchase or construct a house. It comes with the lowest interest rates and processing fees. If you are in some financial crisis, first try to get a top-up home loan which is given with the same interest rate as the original home loan. Some lenders may charge you a few points over the original interest rate but still, it will be pretty low. If a home loan top-up doesn’t fetch you the required amount, then a mortgage loan could be a suitable alternative.