Many people tend to get confused between a home loan and a mortgage loan. They tend to use the terms interchangeably. But, these loans are different. Read on to know about the differences between the two.
Today, many financial organisations in India, including banks and non-banking financial companies, offer different types of loans to suit people’s varying needs. Based on your specific needs, you can get a home loan, car loan, mortgage loan, and much more. Each of these loan types serves different purposes. Many people often get confused between home loan and mortgage loans and believe they are both the same. However, the truth is they are two different financial products.
A home loan is specifically designed to help people get funds for buying or constructing a new home. As the name suggests, a mortgage loan is a type of credit that you can avail by mortgaging an asset with the lender against the amount you borrow. Typically, the lenders do not have any restrictions on the end usage of the amount you borrow.
In simple terms, when you apply for a home or a housing loan, you don’t own the property at the home of getting the loan. When you apply for a mortgage loan, which is also known as LAP (loan against property), you pledge the property you already own.
Let us look at the difference between a home loan and a mortgage loan
- Loan amount
A home is a big-ticket loan, and it is probably one of the most significant credits you may avail of in your life. Generally, the lenders fund up to 80% of the property’s value. Whereas, in a mortgage loan, the maximum amount of loan you get depends on the type of property you pledge. But, generally, you get 50% of the property’s value as a mortgage loan.
- Interest rate
The home loan interest rates are generally lower than the mortgage loan. This is because the government of India aims to make the home loan affordable for all citizens. And, therefore, the Reserve Bank of India has minimised the margin requirements on home loans.
- Loan duration
Another significant difference between a home loan and a mortgage loan is the duration for which you can avail of the credit. Most lenders in India offer home loans for a maximum of 30 years. And mortgage loans have a shorter duration, which is usually 15 years. However, both these types of loans allow you to partially or fully pay the amount before the actual loan tenure. So, if you have sufficient funds at hand, you can prepay and reduce the overall interest outgo.
- Prepayment charges
Regardless of the type of loan you have availed, be it a home loan or mortgage loan, the financial organisations are not allowed to charge a prepayment penalty as per the RBI mandate. The only catch is that you must have availed of the loan on a floating interest rate basis.
If you are nursing a fixed rate home loan and want to prepay a part of the home loan, you may have to pay prepayment charges, which varies from lender to lender.
- Tax benefits
The principal amount you repay for a home loan is eligible for tax deduction under Section 80C of the Indian Income Tax Act to a maximum limit of Rs. 1.5 lakhs in a year. Furthermore, you can get tax benefits up to Rs. 2 lakhs under Section 24 of the IT act on repayment of the home loan interest component.
However, there are no tax benefits on mortgage loans.
Now that you know the difference between a home loan and a mortgage loan make sure that you assess your needs well and apply for the right type of loan.