How is Home Finance different from Home Mortgage?

loan against property

At its basic, Home Finance (also known as Home Loan) refers to the financial assistance taken from a bank or any financial institution (lender) to buy or construct a house; whereas Home Mortgage (also called as Loan Against Property or LAP) refers to financial assistance taken against a house or an immovable property for any use, as per the requirement of the borrower. 

Understanding Home Finance v/s Home Mortgage: 
Home Finance or Home Loan is the financial aid availed to buy a home from a seller or to build a house independently.

Home Mortgage is a kind of loan taken, keeping the house as collateral for that particular loan. Here, any immovable property including residential as well as commercial can be kept as collateral with the lender. In very simple terms, the loan taken is secured against a property.

Loan Against Property

Now, even though both Home Finance and Home Mortgage are secured against an immovable property, the usage of the loan amount makes it different from one another.

In the case of Home Finance, the loan amount has to be used only to buy/ construct a house. However, the amount availed in case of a Home Mortgage can be used by the borrower for any purpose as per his/her requirement. It can be thought of as a larger value personal loan taken against a property.

In both cases, if the borrower is unable to pay the loan taken, the lender has the right to seize and sell off the property to recover its outstanding amount.

Who gives Home Finance and Home Mortgage?
Home Loan, as well as Home Mortgage can be taken from financial institutions such as Banks, Non-Banking Finance Corporations (NBFC), and Home Finance Companies (HFC). 

NBFC, as the name suggests, is a financial institution whose business includes only loans, and no other banking services. Also, HFCs are essentially NBFCs, but deal only in home loans and mortgages.

For instance, Banks include institutions like State Bank of India (SBI), ICICI Bank, Axis Bank, etc.
NBFCs include companies like Bajaj Finserv, Muthoot Finance, Tata Capital, Fullerton India, etc.
HFCs include companies like DHFL, LIC Housing Finance, GIC Housing Finance, etc.

How much amount can be taken on a property?
The maximum amount of loan that can be availed for a property or against property is based on the eligibility of the borrower, as well as the property to be purchased or mortgaged. 

The eligibility of the borrower is based on the repayment capacity, age, and employment status of the borrower. The eligibility criterion for the borrower remains almost the same for Home Loan as well as Mortgage. However, it may differ from lender to lender as per their respective guidelines. More information on this can be found here. (Link to Borrower home loan eligibility article)

On similar lines, eligibility of the property is based on the cost, type, location, and other relevant parameters of the property. The eligibility criterion of the property for a Home Loan can be found here (Link to Property home loan eligibility article).

A borrower has to fulfil the criterion for both himself/ herself, as well as for the property. The lower of the two amounts is sanctioned. 

However, the features of a mortgage differ slightly from a housing loan on the following aspects: 

Maximum Loan Amount: Mortgage can be usually availed only up to 50-70% of the market value of the property (also called Loan-To-Value ratio or LTV Ratio), which is assessed by the lender or a third-party consultant appointed by the lender. Whereas, a home loan can be availed up to 90% of the agreement value. Also, this LTV ratio may vary as per property type, location age, and also from lender to lender. However, some lenders may also grant mortgages up to 90% of the property value in some cases depending on the financial track record of the borrower, repayment tenure, and type of the property.

Tenure: Generally, mortgage loans are offered for up to 20 years tenure or the age of retirement of an individual (and usually 60- 65 years of age for self-employed persons), whichever is lesser. Whereas, Home Loans can be availed for a maximum tenure of 30 years or age of retirement, whichever is lesser. This tenure also varies from bank to bank.

Interest Rates: Mortgages have a higher rate of interest in comparison to Home Loans. Usually, the minimum rate of interest for a Housing Loan starts from 6.8%; whereas the same for LAP starts at around 10% (as of July 2020). Now, these rates may vary from bank to bank, and also according to the amount and tenure of the loan, along with any other criteria as per respective lender.

Also, Home Loans are eligible for subsidies by the government, which further lowers the effective rate of interest. Mortgages are not eligible for any such subsidy.

Prepayment Charges: Home loans taken by individuals do not attract any charges for prepayment or foreclosure if paid through their own funds. However, some lenders charge 1-2% of the prepayment/ foreclosure amount for loans taken by entities other than individuals, and also on foreclosure paid through balance transfer to another bank or lender (for individuals as well). 

In the case of Mortgages, lenders charge around 3-4% of the foreclosure or pre-payment amount as per their rules and guidelines, irrespective of the type of borrower. Also, prepayment up to a certain period (usually 6 months) from the start of the mortgage is not allowed by lenders.

Property Insurance: Most of the lenders make it mandatory to have insurance of the property being mortgaged, at least till the tenure of the mortgage. However, in the case of Home Loan, insurance of the property is not mandatory.

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