Buying a second home? While it is definitely a thrilling prospect that you are finally able to invest in another property, you should definitely get the basics covered right. Are you taking a home loan or considering a loan against your existing property? Which one is the right decision? Read on to find out more.
Home loans are applied for when you wish to purchase a new ready to move in property or even a property which is under construction. These loans are given both for commercial and residential units. Loans against property are often taken for getting emergency or much-needed funds for business purposes, existing home renovation, meeting sudden expenditure and sometimes to invest in another home. Loans against property can be taken in two ways, namely a normal loan where the borrower gets the lump sum figure required with the property being put up as security. Additionally, line of credit facilities are also available sometimes as overdraft mechanisms with a particular limit on the basis of the valuation of the property and repayment abilities of the customer.
Loan against property can be taken even for financing a wedding or higher education of children in many cases but many people use the funding to invest in another property. Will it be a wise decision? That depends upon the circumstances, particularly if you cannot avail of a home loan on account of any factor including repayment ability, meeting the eligibility criteria and also due to any defects in the property title (one that is being bought). The security that you pledge can be either a commercial/residential property. With regard to a home loan, the home being bought is put up as security for the lender until the loan is repaid.
Here’s how these two loan types differ
Tax Benefits– If you are availing of a home loan for purchasing residential property, you can get handsome tax benefits. You can get deductions up to Rs. 1.5 lakh on the principal amount that is being repaid annually under Section 80C. This section covers investments made towards life insurance, PPF, ELSS, ULIPs, NSC, your children’s school fees and so on.
You also get deductions up to Rs. 2 lakh on the annual interest repaid on your home loan under Section 24. In case of loans against property, the tax benefits are dependent on how you are using the money that you have raised. In case this is used for business needs, the paid interest and other fees and charges can be claimed for deduction as business expenditure under Section 37 (1). In case you use the funds for higher education of children or weddings, you cannot get tax benefits. If you buy another home with the money, you can claim interest repaid under Section 24 upon establishing the connection between the loan amount and property bought with the same. There is no principal repayment tax benefit available in case you avail of a loan against property.
Interest rate and other factors-
To protect themselves against any market value depreciation of the property, bankers will never provide the entire value of the asset being pledged as the loan amount. The margin is the difference amount that has been retained. The margin amount is what the borrower has to fork out by himself/herself. The margin needs come under the regulation of the RBI (Reserve Bank of India) and NHB (National Housing Bank) in case of banks and HFCs (housing finance companies). The margin money is dependent on the home loan amount that has been availed. The maximum loan amount given by the lender will be 80-90% of the value of the property.
In case of home loans with high-ticket sizes, the need for the margin can go up to 25%. For loan against property, the margin is higher, ranging between 25-40% in most cases. The interest rate for home loans usually hover between 9-12% based on the borrower profile and lender type. The interest rate on the loan against property is usually a little higher but comparatively lower as compared to personal loans. Rates may hover between 11-14% in usual cases.
Which one should you opt for?
If you are eligible and you have sufficient repayment ability, it is recommended that you apply for a home loan. In case the property you wish to buy has some title issues or other issues which hinder you from getting a home loan, you can then purchase the same by applying for a loan against property.