Home Loan Vs Mortgage Loan: Which Is Cheaper
Is a home loan cheaper than a mortgage loan and what is the difference between them? Yes, it is. Since the interest rate for a home loan is lesser than a mortgage loan, a home loan is more affordable than mortgage.
Before you jump into the home loan market, it's important to familarise yourself with a few banking jargons. A case in point is mortgage and home loan.
Mortgage is a kind of security instrument that you as a buyer give to the lender. This security gives conditional ownership on the asset to the lender, in case you default. The most common home mortgage is the loan against property (LAP), which is the funding given against the borrower's property. The loan is provided as a percentage of the asset's market value, that usually ranges from 40 per cent to 60 per cent.
Home loan, on the other hand, is the debt that you incur when you are about to buy a house. The house stands as a security against which you avail of the home loan. The lender creates a lien on the house till the time you clear the debt.
The striking difference between the three, though, is that the home loan or the mortgage loan is procured only for the purpose of purchasing a property whereas LAP can be taken for any sundry financial needs such as raising capital for business, to fund marriage, medical treatment or higher education, etc. The LAP can be taken against the self-occupied or a let-out property.
Why mortgage loan is expensive than home loan?
- Most banks extend mortgage loans, which is mostly loan against property, for personal purposes.
- Mortgage loan is often obtained for the purpose of repaying the existing loan/debt.
- The credit risk involved in mortgage loans is higher than home loans. The lender presumes that a customer willing to buy a loan at a higher interest rate is facing acute financial stress.
- Loan against property/mortgage loan is the most commonly used loan product for self-employed professionals and non-professionals, thus, strategised to be highly priced.
- In case of defaults, the exit of mortgage loans is not easy for lenders.
- The average LAP ticket size is more than that of a home loan. For a property worth Rs 1 crore, the borrower can raise as much as Rs 60 lakh i.e. if the lender agrees to fund 60 per cent of the market value of the property.
- The mortgage loan is acquired against the property which the borrower already has while a home loan is taken to build an asset or a security, which serves the bank's purpose of Housing for All.
- A home loan up to Rs 28 lakh falls within the purview of Priority Sector Lending (PSL) but LAP does not fall under this category.
Why borrowers shy away from mortgage loans?
The prime reason why mortgage loan is not popular with the borrowers is that they do not want to take the risk of banks attaching their assets, in case they default. There are also, no tax benefits for salaried employees while paying the mortgage loan, unlike in a home loan. The interest on the mortgage loan is very high even for a shorter loan duration. Although you can raise the loan amount of up to 60 per cent of the market value of the property under mortgage loan, you can get the same or even higher amount if you pledge gold. In case of gold loan, if you default, the loss of gold would be a smaller loss compared to you losing your house if you opt for a mortgage loan.
In order to raise funds for personal needs or contingencies, there are a plethora of unsecured instruments like personal loans in the market.