Availing any loan involves a lot of hassle. The problem of whisking from one bank to the other doesn’t arise on availing loan against the property. People often get confused between home loans and loans against property. The two hold importance on different grounds. 

A home loan is the type of loan, which is taken to purchase a house at affordable rates. On the other hand, loan against property can be availed for various reasons. Under this loan facility, the loan borrower can pledge his property to take the loan.

In the case of default, the loss incurred to the banks is recovered in a somewhat similar manner under each case. The defaulter’s house can be auctioned off if he is unable to pay off the debt under the loan against property, while the home loan borrower has to sell his house to repay the outstanding debt. 

Major fields of difference between home loan and loan against property are the following:

  • Purpose
  • Quantum of loan
  • Interest rate
  • Loan tenure
  • Top-Up facility
  • Tax-exemption

The factors above-mentioned hold significant features of the difference between the two financial options available in the market. The following shows the difference between them in a broad sense.

Purpose 

The main ground of difference between the two is the purpose of usage of the loan amount. The loan amount taken under home loan has to be used for the purchase of the plot, renovation of the house or for the purchase of a house. Documents for the end use of the money has to be submitted for the approval of the loan from the bank’s head. While the loan against property can be used for various purposes such as a wedding, foreign studies, travel, and etc., the end use of the fund doesn’t have to be proved. 

Quantum of loan

Real estate holds the potential to put a person under an excessive financial burden. To ease this problem, the banks and NBFCs provide home loans to the borrowers. Home loans grant a higher percent of the valuation of the property. It may escalate up to 90% of the property value. However, in the case of availing loan against property, the loan sanctioned would be up to 70% of the property value.

Interest Rate

The government and the financial institutes offer lower interest rates to the home loan borrowers as they want to make housing affordable to all. The interest rate offered under loan against property is high in comparison to the one provided under the home loan.

Loan Tenure

Loan against property offers a high-value loan, and it takes a significant number of years to repay the debt. It offers flexible tenure spread over a period of 18 maximum for a self-employed individual. The home loan tenure stands in the same range of a maximum of 20 years.

Top-up facility

Loan against property comes with the option of availing a top-up loan, which can be used for various purposes. No document is required to be shown for the end use of the fund taken. The home loan doesn’t provide such a facility, though some banks do offer this facility after vigorous assessment.

Tax-exemption

The borrower cannot enjoy tax exemption benefits on availing the loan against property. But there are several provisions for tax exemption under Low Interest Home Loan, which is applicable as per section 80C and section 24 of the ITA

It is easy to avail of any of the two types of financial products. Both of the financial products come with their own set of rules and regulations and not adhering to all of it can result in a significant loss to the borrower.   

 

The Reserve Bank of India aids commercial banks during a shortage of funds. Repo rate is the rate at which it lends money to the banks when they face a financial crunch. Therefore, when the repo rate is lower, the banks will lend money at a cheaper rate of interest. 

According to the latest monetary policy review, the central bank of India, RBI has reduced its benchmark repo rate. This is beneficial if you have the burden of paying housing loan EMIs. Because the reduction in repo rate means banks will lend money at a lower rate. However, it can impact your debt investment or equity funds as well. 

How the repo rate impacts investments? 

When you take a loan from the bank during a cash crunch, the banks impose a rate of interest. Likewise, the RBI also lends funds to the commercial banks to help them maintain smooth cash flow. Thus, the repo rate is paid by banks to the RBI when they borrow money. If the repo rate is reduced, then the banks will lend money at a lower rate. Reduction in repo rate does not impact your investments directly, but the investments do get affected. Here are some ways in which the repo rate impacts your investments.

Fixed deposits 

Lower repo rate indicates that the commercial banks can lend money at a cheaper rate. Thus, banks will lower their fixed deposit rates as well. When the overall investment rate is low, your returns will also be affected at the time of maturity. However, even with the rise of the repo rate, the interest rates are not increased to a great extent as it may discourage people from investing in fixed deposits. If people stop investing in fixed deposits, then it will cause a liquidity crunch in banks.  

Mutual funds 

Changes in repo rate influence stock prices, which consecutively affects the index prices. When the repo rate is low, the investors can easily take a loan, which results in higher stock prices. Due to the boost in stock prices, the chance of getting higher returns from the mutual fund also rises. 

The lower repo rate also makes the funds available at an affordable interest rate, which helps to escalate the demand in the market. Because of high demand, the consumption rate also increases, which determines higher usage. This cycle assures that the market keeps running smoothly. After the reduction of the repo rate, if this cycle continues, the individuals who have invested in mutual funds can expect higher returns. 

Savings accounts 

While RBI reduces the repo rate, some nationalized banks reduce their interest rates on large saving accounts. In most banks, the savings accounts over Rs 1 lakh, gets affected. However, the savings accounts with less than Rs 1 lakh remains unchanged. At the same time, the repo rate will affect the interest rate on several short terms loans as well. 

READ:- Difference Between Bank Rate & Repo Rate

The change in the repo rate affects every area of the economy. The Reserve Bank of India changes the repo rate to control inflation in the market and to maintain liquidity in the market. Owing to the slow market growth, the equity market takes the repo rate cut positively. The companies can access funds at lower rates, which encourages them to borrow more, and results in a hike in investments as well as cause overall industrial growth. This may result in increased consumption that is needed to combat the current slowdown in the economy.