Mortgage vs Home Loan — What Indian Buyers Actually Need to Know

The short answer is – No.

The ambiguity here is that every home loan includes a mortgage. Whenever you avail yourself of a home loan, the property you plan to buy gets mortgaged to the lender until the entire loan repayment is done. This transaction is known as a mortgage. Not every mortgage is necessarily a home loan, however.

The purpose of a home loan is to finance your purchase, construction, or renovation of the house. It depends on the cost of the property being purchased or constructed and is solely meant for housing requirements.

Mortgage loans are different from home loans in the sense that in mortgage loans, rather than financing the purchase of the property, you are borrowing against the property you already have. The borrowed amount can be utilized for other purposes as per the guidelines set by the lender.

The simplest way to distinguish between the two would be to answer one simple question to yourself:

• Looking to buy a property? Home loan is probably your best bet.
• But if you are in need of money and have a property in hand, then mortgage loan would probably suit you better.

Both the loans are backed by a property, but the two vary in terms of the reason for which it is taken, cost involved, tax savings, and eligibility requirements.

There is no need to analyze all the features before making up your mind. In almost all cases, your financial objective will make it clear which loan you should opt for.

Select a Home Loan if You:

• Buy your first house.
• Are buying an apartment or a villa.
• Are building your house yourself.
• Are remodeling or upgrading your existing house.

Wish to avail of the tax benefits that are offered for some home loans.

Select a Mortgage Loan if You:

• Already have any residential or commercial property.
• Need to raise funds for expanding your business.
• Are planning to finance your higher education.
• Need funds for emergencies related to health problems.
• Wish to consolidate existing loans or fulfill any other financial requirement.

In case you cannot decide, just keep this rule in mind home loan enables you to buy a house, and mortgage loan assists you in extracting money from a property you have.

A home loan is specially tailored to the purchase of, construction of, or renovation of residential property. These loans come with attractive interest rates, extended repayment periods, and even tax deductions for qualifying individuals.

Buying a New Home

Whether you are buying your first ever house or upgrading to a bigger villa, the home loan will help you break down the costs of buying the property into EMIs. However, before applying for the loan, you should assess your capacity to repay and check on other factors related to the property.

Buying an Under-Construction or Resale Property

There are home loans available for both under construction homes as well as resale homes however, it is essential that these be evaluated properly. In case of an under construction home, one needs to verify the background of the builder, his/her approvals, and when the house will be delivered.

Constructing a House

When you already have land, many banks provide construction loans which you can use to construct a house. Such loans are normally given out in installments, depending on the progress in the construction work. Having your approved plans for construction, budgeting and the necessary permits will make the process easy.

When you are taking the loan to buy, construct or even renovate your house, then a home loan is the most appropriate form of finance that you should opt for.

The mortgage loan or Loan Against Property (LAP), as it is known in India, is a type of loan that is offered to individuals who are in possession of some sort of property and require funds for any purpose except purchasing a new one. Rather than disposing of your property, it provides you the opportunity to get a loan against it.

Business Expansion

Most entrepreneurs or business owners resort to taking out mortgages to fund their growth needs such as expansion, equipment, increased inventory, and improving their cash flow. With the fact that mortgages are collateralized, lenders tend to offer bigger sums compared to unsecured business loans.

Higher Education

A mortgage loan may also be used to pay for education costs such as tuition costs, accommodation, and many others. People who already have property will usually take up this kind of loan whenever they need to borrow a bigger amount of money.

Medical Emergencies

The occurrence of unexpected medical costs may be financially challenging for a family. If one borrows against the existing property, then it would give the ability to access considerable sums of money when the need arises.

Debt Consolidation and Other Financial Needs

Some borrowers take a mortgage loan to consolidate various loans into one or finance their significant personal expenditures like home renovations and family needs. Due to the property being the collateral, the lender analyzes both the market value of the property and your repayment capability.

The mortgage loan would be appropriate in case your intention is raising money rather than buying property. It is important for you to compare the interest rates, charges, repayment period, prepayment terms, and the overall cost of borrowing before taking the loan since the property acts as collateral.

Although both types of loans are guaranteed by the value of your property, there are significant differences between them in terms of the objective, cost of borrowing, tax advantage, and repayment.

1. Purpose of the Loan

The primary distinction is the reason behind your borrowing requirements.

In a home loan, the funds raised are used towards the purchase, construction or renovation of residential property. It is a specific use of the loan, and the property used is the collateral security.

In a mortgage loan (or Loan Against Property), you are allowed to borrow based on the property that you have already purchased. The funds raised are for business growth, education, medical reasons, etc., depending on the conditions set by the lending institution.

This implies:

If homeownership is your purpose, go for a home loan. However, if you have an existing property and need funds for other reasons, then a mortgage loan may be more appropriate for you.

2. Interest Rates and Cost of Borrowing

The interest rates offered in home loans are relatively low since the purpose is to encourage homeownership. On the other hand, mortgage loans are relatively expensive in comparison with the former. Yet, you shouldn't compare different loans only by the interest rate.

There is also other stuff to look at:

• Processing fee
• Legal and valuation costs
• Insurance costs (if any)
• Fee for pre-payment or foreclosure
• Transfer fee

What does it mean to you?

The loan with the lowest interest rate is not necessarily the cheapest one.

3. Tax Benefits

Advantages associated with home loans include the provision for tax relief in relation to the repayment of the principal as well as the interest paid. This is subject to the regulations of the Income Tax Act as well as your own suitability.

The same cannot be said for mortgage loans, which do not necessarily afford the same tax reliefs. This all depends on the application of the funds and the tax regulations.

Implications for you:

In case tax savings are an important factor for you, a home loan can be more beneficial for you.

4. Eligibility and Documentation

Evaluation of the borrowers’ income, their repayment capacity, credit rating, and previous financial records will be done in both cases by the lending institutions. In addition, legal aspects of the property being used are investigated.

Where there is mortgage loan application, value, legality, and ownership of the property used as security become more important.

Implications to you:

Provision of documents like income records, banking details, identity proof, and documentation relating to property can make things easier.

5. Repayment Flexibility

House loans generally have longer repayment periods due to which the EMI is easy to pay.

Mortgage loans also have repayment flexibility, however, the tenure and loan amount depend on certain factors like value of property, your financial standing, and the policy of the bank.

It is advised that before going ahead with any kind of loan, make sure that your lender allows:

• Pre-payments
• Foreclosure
• Balance transfer
• Flexibility in EMIs

How it helps you:

A loan that offers more repayment flexibility may be more valuable for you compared to a loan at lower interest rates.

No loan can suit every individual. Your choice of a loan should be made on the basis of your purpose of borrowing the amount, availability of your property or not and your capacity to repay the amount. Rather than looking out only at interest rate, consider choosing the most appropriate loan for yourself on the basis of your goal.

Home loan would definitely be your most appropriate choice in case you are purchasing a new house, upgrading your old house, building up a new house or doing any kind of renovation work in your existing house.

A Mortgage Loan (Loan against Property) is a better choice when you already have an asset and need money for various things like business development, education, hospitalization, debt refinancing, etc. The Mortgage loan enables you to unlock the equity in your asset without disposing of it.

Questions to ask before opting for the Loan include:

• Am I buying an asset or just borrowing money?
• Do I own an asset that can be used as security?
• Am I comfortable making the monthly EMI payments?
• Have I taken into account the entire cost of borrowing and not just the interest rate?
• Is the loan going to help me achieve my financial objectives?

Borrowing the wrong kind of loan may lead to higher borrowing charges as well as stress. The following are some typical errors to avoid when taking out a loan.

1. Picking Up the Wrong Loan for Your Needs

Several people think that a mortgage loan and a home loan are same. When it comes to purchasing a house, then it would be better to take a home loan. In case you own a property but require money for something else, then mortgage loan would suit you better.

2. Looking at the Interest Rates Only

A low interest rate does not necessarily mean a cheap loan. It is important to consider the total cost of borrowing, which includes processing charges, legal expenses, valuation charges, insurance charges, and prepayment or foreclosure expenses.

3. Borrowing Excess Money

Sometimes taking a loan in excess of your requirement can result in increased EMI payments. Take only that loan which suits your budget and future plans.

4. Neglecting Property Documents

In case you are seeking either a home loan or a mortgage loan, neglecting or misinterpreting property papers may lead to a delay in the application procedure. It is recommended that one examines ownership papers, permissions, and documentation before applying.

5. Neglecting Repayment Flexibility

It is important to find out whether the bank allows partial pre-payments, foreclosures, and balance transfers prior to concluding the loan agreement.

Not making such mistakes will help you choose the appropriate way of financing.

Selecting the correct loan is not the only step towards purchasing a home. The selection of the correct property that suits your budget, lifestyle and future goals is also equally critical.

The process becomes easy using Homefleet, which consolidates the verified residential projects from across Hyderabad at one platform. You do not need to go through various websites of different builders and then shortlist your property based on location, budget, amenities, connectivity and the possibility of further growth.

Whether you are searching for your first apartment or planning to upgrade or just looking for a property for investment purposes, you would find it easy to select projects based on your needs through Homefleet. Having identified your correct property, you will have an easier task of calculating your loan requirement and comparing your lenders. It can help you make better decisions regarding your property and financing needs.

Differences between Mortgage vs Home Loan have to be known prior to making an application for either one of these types of loans. Although the home loan is used by an individual to buy, construct or renovate a property, the mortgage loan or Loan Against Property is borrowed against an already available property.

Apart from the interest rate of the loan, think of its purpose, cost of borrowing, repayment process and how it contributes towards achieving your financial objectives. Opting for a right loan will save on cost, make repayment easy, and make your financial path easier.

Homefleet assists you to find out about verified residential properties in Hyderabad for buying a house and making better decisions on properties even prior to applying for a home loan.