What is the Difference Between Home Loan and Mortgage Loan?
Home loan and mortgage loan are the two terms that are often used interchangeably, but they are not the same as people think. They are different in terms of the loan to value ratio, interest rate, processing fee and repayment tenor. Let’s read the article and understand what are home loans and mortgage loans and how do they stand different from one another.
What is a Home Loan?
In a home loan, a borrower takes the money from a bank and uses it to either buy a flat or house or for building a new house. You can even take a home loan to buy a piece of land or to renovate your existing house. Home loans are also considered as a secured form of loan because the house or the land for which the borrower is taking the loan is held by the lender as collateral. It can only be released after the borrower has repaid the entire amount of the loan in the form of monthly instalments. If the borrower fails to repay the loan amount, then the lender is allowed to liquidate the property and recover the pending dues.
What is a Mortgage Loan?
Unlike the home loan, a mortgage loan can be taken and used by the borrower for any purpose. But the one similarity between these two loans is that for sanctioning the loan amount, the lender takes ownership of the property till the borrower repays the entire amount.
Difference between Home Loan and Mortgage Loan
Let’s discover the essential details between a home loan and a mortgage loan
Purpose of the loan
Home loan – It can only be used to purchase land, a house, flat or to build a house or to renovate an existing one.
Mortgage loan – There are no restrictions on mortgage loans on how to use them. Borrowers can make use of the sanctioned fund to meet both personal and business requirements.
Loan-to-Value (LTV) ratio
Home loan – Applicants can get a loan amount of up to 90% of the property’s market value.
Mortgage loan – Borrowers can only avail of a loan of up to 60% to 70% of the property’s market value.
Interest rate
Home loan – Low-interest rate as compared to the mortgage loan.
Mortgage loan – Interest rates of mortgage loans are generally 1 to 3 percentage points higher than interest rates of home loans.
Processing fee
Home loan – Borrowers have to pay 0.8% to 1.2% processing fee of the total loan value in case of a home loan.
Mortgage loan – Typically, the processing fee of a mortgage loan is 1.5% of the total loan value.
Repayment tenor
Home loan – Tenor of home loan can be of up to 30 years.
Mortgage loan – Tenor of mortgage loan can be of up to 15 years.
Top-up loans
Home loans – On home loans, borrowers do not usually get top-up facilities. However, this is not always the case. Few lenders provide the facility of top-up after assessing the repayment capacity of borrowers.
Mortgage loan – Applicants usually get the facility of top-up on mortgage loans. This is possible when the borrower is eligible for a much larger amount of loan than he has initially opted for.
Tax exemption
Home loan – According to Section 80C of the IT Act, applicants can apply for a tax deduction of up to Rs. 1.5 Lakh on the principal amount. They can claim another exemption under Section 24 on the interest payment of the home loan.
Mortgage loan – There are no tax exemptions in the case of mortgage loans.
Documents Required to Get a Home Loan and a Mortgage Loan Sanctioned
Both for home loans and mortgage loans, the documents required are similar. Given below is a list of all the documents that a borrower has to show to the lender while applying for both a home loan and mortgage loan.
- ID proof (Aadhar card, PAN card, Voter ID card or Driving license)
- Address Proof (Passport, Electricity bill, Water bill, House tax bill or any other ID proof)
- Property documents (original)
- Income tax returns
- Bank statements for the last 3 to 6 months
Things to keep in mind before Applying for a Home Loan/Mortgage Loan
Interest rate
There are two types of interest rates – a fixed interest rate that changes as per the market and a floating interest rate that remains the same throughout the tenure.
Term of the loan
It depends on the age of the borrower. Younger the borrower, the longer the tenure he can get for repayment.
The Credibility of the lending institution
Choose the lender who has a good reputation in the market.
Servicing strength of the lender
Compare the services of the lender and then choose the most suitable one for you. Tenure of home loans and mortgage loans are lengthy, which makes this point very important.
The difference between a home loan and a mortgage loan is easy to understand. If your sole purpose for taking a loan is to buy land, a house or a flat or you want to renovate your existing house, then taking a home loan is the best option, as you will be using it for that purpose only. But, if you have any other requirements to complete, you can apply for a mortgage loan.
