When we decide to buy a big asset such as a car or property, most of us have to take out a loan to help finance the purchase. Banks and financial institutions offer various credit options to cater to individuals' different needs.
When talking about real estate investments and purchases, most people get confused between the difference between a home loan and a mortgage loan and very often use the two interchangeably. But they are not the same, so the home loan vs. mortgage loan confusion needs to be clarified.
In most simple terms, a loan taken to purchase, renovate, or construct a house is a home loan, and a mortgage loan is a loan taken against a property as collateral. A mortgage loan is also known as a loan against property, as you mortgage a property against the loan amount. In this article, we will understand the difference between a home loan and a mortgage.
What is a Mortgage Loan?
A mortgage loan is a secured loan taken to assist in any type of financial situation. It could be taken for a child's education, a medical emergency, business expansion, etc. With a mortgage loan, you leverage your property's value but retain ownership.
What is a Home Loan?
A home loan is a loan taken from any lender for a specific purpose of purchasing, renovating, or constructing a house or any residential property or land. So, the most important to understand in home loans vs. mortgages is that home loans are designed specifically for purchasing residential properties. In contrast, mortgage loans have a more versatile scope and can be used to finance various things.
Difference between Home Loan and Mortgage Loan
Mortgage loan vs home loan is a question that needs clarity and understanding to choose the correct loan according to your needs and usage. The main difference between the two lies in the usage and purpose; while a home loan is taken for the fixed intention of buying any residential property, a mortgage is more flexible in its usage. The difference between a home loan and a mortgage loan is explained based on various aspects:
Mortgage loan vs Home loan: Interest rate
One of the most important aspects to consider when taking out a loan is the interest rate. Between home loans vs. mortgage loans, the interest rates of a home loan are less.
- Mortgage Loan: Mortgage loans are considered higher-risk loans with a broader use. So, the interest rate on mortgage loans is usually 1-3% higher than the interest on home loans.
- Home Loan: Home loans are not as risky as mortgage loans, so their interest rates are generally lower and more cost-effective. The interest on home loans is linked to the RBI's repo rates.
Mortgage loan vs Home loan: Loan to Value
The amount of loan that lenders will approve also differs between a mortgage loan and a home loan. A loan-to-value (LTV) ratio determines how much you can borrow against your property value.
- Mortgage Loan: The LTV of a mortgage is lower than a home loan, around 60-70%. The amount sanctioned depends on the property's value.
- Home Loan: The LTV for a home loan is higher, around 80-90%. Before approving a home loan, lenders consider age, income, job stability, etc.
Mortgage loan vs Home loan: Usage
The use of the loan amount is one of the main differences between a home loan and a mortgage loan.
- Mortgage Loan: A mortgage loan can be used for various purposes, such as marriage, child's education, business expansion, buying a car, medical expenses, or anything else.
- Home Loan: A home loan can only be used for the specific purpose of buying a house or plot or building or expanding a house.
Mortgage loan vs Home loan: Tenure
The number of years the loan will continue and the time within which the loan amount plus interest is to be repaid is the tenure.
- Mortgage Loan: Mortgage loan tenures are shorter, with a maximum of up to 15 years. So, mortgage monthly payments are higher. However, they are also paid off quickly.
- Home Loan: Home loans are available for a longer period, up to 30 years. The monthly payments are less than those of mortgage loans, but the time taken to repay the loan amount increases.
Mortgage loan vs Home loan: Documentation
All the papers, ID, address proofs, etc., required to avail of the loan and finish the process of getting a loan, and the time it might take to finish the documentation and verification process also differ for a home loan vs. a mortgage loan.
- Mortgage Loan: The lending institution or bank will take longer to finalise the documentation for mortgage loans as they must thoroughly check and evaluate the property, verify the property ownership, etc.
- Home Loan: The documentation and verification process is comparatively more straightforward and quicker for home loans and is usually completed in about 15 days.
Mortgage loan vs Home loan: Taxation
The tax savings available for home loans and mortgage loans differ.
- Mortgage Loan: There are not a lot of tax benefits available for mortgage loans, except if you use the loan amount to purchase a new house under section 24 of the IT Act.
- Home Loan: Home loans are eligible for a deduction of up to 1.5 Lacs on the principal amount under section 80C of the IT Act.
Frequently Asked Questions
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Is a loan secured against property or real estate a type of mortgage loan?
Yes, a loan secured against any property or real estate is a type of mortgage loan.
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Is it cheaper to take out a home loan or a mortgage loan?
A home loan is the cheaper option for buying a flat or house, as the interest rate and processing costs are lower than those of a credit card.
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Is a home loan or mortgage loan subject to a collateral requirement?
Yes, both home loans and mortgage loans require collateral. A mortgage is available only against collateral property, and for a home loan, the land or house you are buying will become the collateral.
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Who Can Apply For Home Loans And Mortgage Loans?
Anyone who meets the lender's eligibility criteria can apply for a home loan and mortgage loan, whether a salaried or self-employed individual.
