Difference between home loan and mortgage loan
The term home loan is often used interchangeably with the term mortgage loan, but they are not the same things. In this article, we will talk about the two products in detail and how they differ from each other.
What is Home Loan?
In a home loan, a borrower takes money from the bank to buy a house or flat or to build a new house. You can also take a home loan to renovate your existing home or buy land. This type of loan is usually a secured form of loan in which the home for which the loan is being taken is put as collateral by the lender.
It is issued when the entire loan is repaid by the borrower in the form of monthly installments. If the borrower is unable to repay the loan and becomes insolvent, the lender has the right to liquidate the home to recover the pending dues.
The loan-to-value (LTV) ratio or the percentage of the amount that can be financed through a home loan is high at around 85-90%. This is one of the key differences between home loan and mortgage loan. Also, the home loan comes with both a fixed interest rate and a floating interest rate option.
The home loan tenure in India is up to a maximum of 30 years. Home loans also attract a processing fee which is usually 0.5-1% of the loan amount.
What is a Mortgage Loan?
Unlike a home loan, mortgage loan can be taken and used by the borrower for any purpose. However, it shares a similarity with a home loan — the lender takes ownership of the borrower’s property until the repayment is complete. Mortgages have an LTV ratio of 60-70%.
This means the borrower will be eligible to receive only 60-70% of the current market value of the collateral in the form of a loan. The processing fee on these loans is generally 1.5% of the loan amount, and a top-up facility is also available.
This facility allows the borrower to get additional funds on the existing loan without much paperwork. In mortgage loan, the tenure is up to 15 years. The interest rates on mortgage loans are slightly higher (1-4%) than the interest rates offered on home loans.
Home Loan Vs Mortgage Loan
The table below gives a tabular difference between home loan and mortgage loan on some key parameters.
Parameters Home Loan Mortgage Loan
- Definition Intent to purchase residential property or a piece of land There is no restrictive covenant on this type of loan. Borrower can use the loan amount for any purpose
- Loan-to-Value (LTV) Ratio typically 85-90% of the current market value of the property 60-70% of the current market value of the property
- Rate of interest Lower than mortgage loans 1-3% higher than that of home loans
- Processing fee 0.8-1.2% of total loan amount 1.5% of total loan amount
- Loan tenure up to 30 years up to 15 years
- Tax benefits offered under section 80C, section 24, section 80EE, section 80EEA, no tax benefit
Documents required to get mortgage loan in India
For home loan as well as mortgage loan, the documents are more or less same. Given below is a detailed list of documents required while applying for a home loan or mortgage loan in India:
- ID Proof (PAN Card, Aadhar Card, Driving License, Voter ID Card)
- Address proof (electricity bill, house tax bill, water bill, passport, or any other ID proof)
- income proof document
- bank details
- property documents
- income tax return
FAQ About home loan or mortgage loan
Q. Which is cheaper source of financing, home loan or mortgage loan?
Ans :- If you are planning to buy a flat or house then home loan is cheaper as the interest rates and processing fee on home loan are lower than the interest rate and processing fee.
Q. Is there any collateral requirement in home loan or mortgage loan?
Ans :- Yes, the property or house you are planning to buy or build a new home is the collateral in these loans.
Q. Is a Loan Against Property a type of mortgage loan?
Ans :- Yes, Loan Against Property is a type of mortgage loan.