Home Loan vs Mortgage Loan: Everything You Need to Know

Buying a new home is one of the most significant events in one’s life. Requiring a considerable investment, it is quite common for people to avail of certain financial aids while purchasing or building a new home. And a home loan is precisely designed to help homebuyers finance their purchase or construction of the property. 

Another form of financial aid is a mortgage loan, which is a little different from a home loan. However, people often get confused between these types of loans, so it is essential to know exactly what benefits each type of loan offers before applying for either.

Here is a detailed comparison between home loan and mortgage loan so that the applicant can pick the one that suits their needs the best:

What is a Home Loan?

A home loan helps the applicant obtain funds from a bank or a financial institution that can be used to purchase or construct a residential property. This type of loan can also be used for modification or renovation of the applicant’s existing residential property. 
A home loan is a secured loan, meaning the lender can use the house as security for the loan. Thus, if the borrower fails to repay the loan, the bank can sell the house to recoup their money. 

What is a Mortgage Loan?

While a home loan has a definite purpose and can only be used for the same, a mortgage loan can be applied for and can be used for any purpose by the borrower. However, there is one similarity that this type of loan shares with a home loan- the financial institution takes ownership of the borrower’s property until the repayment is completed.

Difference Between Home Loan and Mortgage Loan

Here is a detailed comparison of both loan types based on different factors: 

• Loan-to-value ratio

The loan-to-value ratio is one of the most critical factors that a borrower must consider while applying for credit. 

In the case of a home loan, 80 to 90 per cent of the property’s current market value is covered. This means that the borrower will be eligible to get 80 to 90 per cent of the collateral’s present market value as a loan.

On the other hand, a mortgage loan could cover up to 60 to 70 per cent of the property’s value. 

• Interest rate

The interest rate is another important factor that every applicant must consider. Usually, home loans have a lower interest rate as compared to mortgage loans. The interest rate charged on mortgage loans is typically 1 to 3 per cent higher than on home loans.

• Processing Fee

Processing fee might be one of the overlooked features by most applicants, but it can make a lot of difference. Regarding a home loan, the processing fee varies from 0.2 to 1 per cent of the amount. On the other hand, the processing fee of a mortgage loan is a little higher, as the lenders usually charge around 1.5 per cent of the loan amount. 

• Loan Tenure

The loan tenure is yet another factor to consider, offering convenience for your repayment. A home loan tends to offer the borrower a longer payback tenure, which can even go up to 30 years in some cases. However, when it comes to mortgage loans, the payback period can go up to 15 years. 

• Top-up Loans

One of the benefits of a mortgage loan is that it typically allows the borrower to get a top-up loan over the existing loan. This is because the borrower might be eligible for a bigger loan amount than they initially opted for. For instance, if the borrower is eligible for a loan amount of up to 70 per cent of the total property market value but they have opted for a loan of just 50 per cent of the entire value. Now, the borrower is capable of taking a top-up loan for the remaining amount. 

However, this feature is typically not offered to home loan applicants. However, some lenders might offer it based on their assessment of the borrower’s repayment capabilities. 

• Tax Exemption

In the case of a home loan, the borrower is eligible to claim a tax deduction of up to Rs. 1.5 lakh under section 80C on the principal repayment. Moreover, the borrower can also claim an exemption under Section 24 on the interest payment of a home loan. Unfortunately, there are no tax benefits offered to general-purpose mortgage loans. 

Conclusion

Both home loan and mortgage loan have their own features, purpose, and benefits that can help the borrower. We hope that this information will help you differentiate between the two loan types and help you pick the one that suits your needs and requirements best and assists you in reaching your goals.