Lending institutions offer different kinds of loans for various purposes. A home loan is provided exclusively to suffice your housing needs, including buying, construction, and renovation of your home. While the term home loan is preferred in India, they come under the umbrella term mortgage loans in other countries like the USA. However, unlike home loans, mortgage loans are not restricted to suffice your housing needs. The borrower can use them for other purposes as well. Hence, there is some confusion between a home loan and a mortgage loan. Let’s discuss this in detail.
Mortgage loans are of two types – home loans and loans against property. While both the loans help you realize your requirements, there is a slight difference between a home loan and a loan against property. Mortgage loans basically refer to the type of loans that use a residential or commercial property as an asset. However, in India, a loan against property is mostly referred to as a mortgage loan. Understanding the similarities and differences might help solve your query. Read further to learn about the features of a home loan and a mortgage loan and the differences between the two.
What is a home loan?
As the name suggests, a home loan is exclusively for purchasing a house or property.
Home loans are utilized to purchase a new plot or acquire funds for investment or upgrade a property. A borrower uses a home loan to obtain funds from a lending institution to purchase or construct a home. You can also utilize a home loan to modify your current home or buy land.
The home loan is a secured loan, which means that the lender holds the house as security for the loan tenure. Once the borrower pays off the whole loan in monthly payments, the borrower gains complete ownership of the property. If the borrower cannot repay the loan and declares bankruptcy, the lender has the right to sell off the property to recoup the debt.
Home loan essentials
- Tenure- The tenure of a home loan generally varies between 5 to 30 years.
- Interest- The home loan interest rate is significantly cheaper than a mortgage loan and varies between 6 to 12%.
What is a mortgage loan?
A mortgage is a contract between the borrower and lender primarily in countries like the United States. If a borrower fails at repaying the loan and interest amount, the lender can seize its assets. When borrowers take a mortgage, they may use the loan as per their requirements without putting up any cash upfront. Mortgage loans, unlike house loans, can be taken out and used for any purpose. However, just like housing loans: the lender keeps the possession of the borrower’s property until the debt is repaid in full.
Mortgages have a Loan to Value ratio of 60%-70%. It indicates that the borrower will only be able to receive a loan for 60-70% of the collateral’s current market value. The processing charge on these loans is usually up to a maximum of 1.5% of the loan amount, and there is also a top-up option. This facility enables the borrower to obtain extra cash for an existing loan without going through a lot of documentation. The term of a mortgage loan might be up to 15 years. The interest rates on mortgage loans are higher (1-4 percent) than the rates on home loans.
Prime differences between home loans and mortgage loans
Now that you’ve understood the basics of home loans and mortgage loans, let’s look at some differences.
- Purpose– The purpose of a home loan is to purchase a home or a piece of land, whereas there are no restrictions on mortgage loans. The loan can be used for any purpose by the borrower.
- Interest Rate– The home loan interest rate differs on various factors such as age, tenure, and the type of interest. There are two types of interest rates; fixed interest rate and floating interest rate. Interest rates for home loans vary between 6 to 12%. In the case of a mortgage loan, the interest rates are usually higher by 2-3% than a home loan.
- Loan Tenure– Home loans are available for up to 30 years, whereas mortgage loans usually have a tenure ceiling of 15 years.
- Tax Benefits– There are multiple tax benefits offered for home loans under Section 80 of the Income Tax. In the case of mortgage loans, there are no tax benefits.
Home loans and mortgage loans are often used interchangeably. Home loans are referred to as loans to purchase houses in India, whereas in the US, the term home loans are replaced with mortgage loans. Various lending institutions offer attractive schemes for home loans. Read all the terms and conditions offered and choose the best option for you.