Many people think that home loan and mortgage loan are the same thing. And when they know they’re different, they wonder: Are home loans cheaper than mortgage loans and what’s the difference between them? The answer is yes!
Reason: Interest rates for home loans are lower than mortgage loans. Before you jump into the home loan market, it’s important to familiarize yourself with some banking jargon. A case in point is mortgages and home loans. A mortgage is a type of security instrument that you, as a buyer, give to a lender. This security, in case you default, gives the lender conditional ownership over the asset. The most common home mortgage is a loan against property (LAP), which is a loan against the borrower’s property. The loan is provided as a percentage of the property’s market value, which usually ranges from 40 percent to 60 percent.
A home loan, on the other hand, is a loan that you take when you are going to buy a home. The house stands as the security against which you avail the home loan. The borrower creates a lien on the home till then. However, the critical difference between the three is that a home loan or mortgage loan is taken only for the purpose of purchasing an asset, whereas a LAP can be taken for any sundry financial needs, such as for a business. Raising capital, funding marriage, medical assistance treatment or higher education, etc. LAP can be taken against self-occupied or let-out property.
Why are mortgage loans more expensive than home loans?
Most banks extend mortgage loans, which are mostly loans against assets, for collateral purposes.
A mortgage loan is obtained for the purpose of repaying an existing loan / debt.
The risk involved in mortgage loans is higher than that of home loans. Lenders assume that the customer is facing severe financial stress to purchase a loan at a high interest rate.
Loan against property / mortgage loan is the most commonly used loan product for self-employed professionals and non-professionals, thus, it is a very cost effective strategy.
In case of defaults, it is not easy for lenders to get out of mortgage loans.
Average LAP ticket size is higher than home loan. For a property worth Rs 1 crore, the borrower can raise funds of Rs 60 lakh, meaning the lender agrees to fund 60 per cent of the property’s market value.
A mortgage loan is acquired against an asset that the borrower already owns while a home loan is taken for the asset or security, which serves the purpose of housing for all of the banks.
A home loan of Rs 28 lakh falls under Priority Sector Lending (PSL) but LAP does not fall under this category.
Why Borrowups Avoid Mortgage Loans?
The main reason why mortgage loans are not popular with borrowers is that they do not want to risk banks attaching their assets in the event of default. As with home loans, there is also no tax benefit for salaried employees while repaying mortgage loans. Interest on mortgage loans is very high for short loan duration. Although you can raise the loan amount up to 60 percent of the property’s market value under a mortgage loan, you can get the same amount or more if you pledge gold. In the case of gold loans, if you default, the loss of gold will be less compared to losing your home if you opt for a mortgage loan. To raise funds for perupeesonal needs or contingencies, there are unbalance instruments in the market like perupeesonal loans.