“Home loan”, “mortgage loan” and “loan against property” are terms often used interchangeably, but they refer to different financial products. Understanding these differences can help you make informed decisions when financing your property needs.
A home loan is a loan taken to purchase or construct a new home. It typically has a loan term up to 30 years with a competitive interest rate.
The borrower repays the loan in weekly, fortnightly or monthly instalments that cover both the principal (loan amount) and interest, which can be fixed or variable.
A mortgage loan is similar to a home loan, but is secured by real estate property, typically residential or commercial. It can be used for purchasing a new property or refinancing an existing property. The terms and conditions of mortgage loans can vary based on the lender and the borrower’s financial situation.
A loan against property is a secured loan using residential or commercial property as collateral to secure financing. The loan amount is usually a percentage of the property’s market value.
A loan against property can be used for various purposes such as business expansion, funding education or medical expenses. The interest rates for this loan are typically lower than unsecured loans, but higher than home loans.
When considering which type of loan to choose, work with a trusted mortgage broker in Sydney like Loan Station to analyse your needs and guide you.
When each type of loan might be used
1. Home loan
Example 1 : A young couple Jack and Emma are looking to buy their first home. They have saved a $50,000 deposit and are seeking a loan to cover the remaining cost of the property, $450,000.
Example 2 : Sarah and Tom have outgrown their two-bedroom apartment and want to purchase a four-bedroom home closer to good schools. They sell their apartment and use the proceeds, along with a home loan, to buy their new home.
2. Mortgage loan
Example 1 : Alex owns a growing tech business and decides to purchase an office building to accommodate his expanding team. He takes out a mortgage loan to finance the purchase.
Example 2 : A group of investors pool their resources to buy a shopping centre. They use a mortgage loan to cover a significant portion of the purchase price and plan to generate income from leasing out retail spaces.
3. Loan against property
Example 1 : David’s daughter is getting married and he needs $100,000 to cover the wedding expenses. He uses his home as collateral to secure a loan against property.
Example 2 : Linda has several credit card debts and personal loans with high interest rates. She takes out a loan against her property to consolidate her debt into one loan with a lower interest rate.
Key differences and considerations when choosing between these type of loans
1. Purpose of the loan
Home loan : Ideal for purchasing a residential property or investment property.
Mortgage loan : Suitable for acquiring commercial real estate for business use or investment.
Loan against property : Flexible for large personal expenses, business needs or debt consolidation.
2. Interest rates
Home loan : Typically, home loans have the lowest interest rates among the three options due to the lower risk associated with residential properties.
Mortgage loan : Often has higher interest rates compared to home loans, reflecting the higher risk and complexity associated with commercial properties.
Loan against property : Generally has higher interest rates than home loans, but lower than unsecured loans because the existing property serves as collateral.
3. Loan term and repayment flexibility
Home loan : Usually offers longer loan terms, up to 30 years, providing more manageable monthly repayments.
Mortgage loan : Terms can vary widely, but are often shorter than home loans, typically ranging from five to 20 years.
Loan against property : May offer shorter terms compared to home loans, with terms often ranging from five to 15 years, depending on the lender.
4. Loan amount and valuation
Home loan : The loan amount is usually a percentage of the property’s purchase price or market value, commonly up to 80-90%.
Mortgage loan : The loan amount is based on the value and income potential of the commercial property, often up to 60-70% of its valuation.
Loan against property : The loan amount depends on the value of the existing property being used as collateral, typically up to 60-70% of its market value.
5. Eligibility criteria and documentation
Home loan : Lenders will assess income, credit score, employment stability and existing liabilities. Documentation includes proof of income, credit history and property details.
Mortgage loan : More stringent criteria, including business financial statements, income projections, property appraisal and sometimes a business plan. Documentation includes business financials, property details and credit history.
Loan against property : In addition to income and credit assessment, lenders will evaluate the property’s title, market value and existing mortgages. Documentation includes property papers, income proof and credit history.
6. Risk and collateral
Home loan : The purchased property serves as collateral. If the borrower defaults, the lender can repossess the home.
Mortgage loan : The commercial property is collateral. If the borrower defaults, the lender can take ownership of the commercial property.
Loan against property : The existing property is collateral. If the borrower defaults, the lender can seize the pledged property.
7. Tax implications
Home loan : Interest paid on a home loan for an investment property may be tax-deductible.
Mortgage loan : Interest payments are typically tax-deductible as a business expense.
Loan against property : Interest paid on a loan against property used for business purposes may be tax-deductible.
8. Fees and charges
Home loan : Includes processing fees, valuation fees and sometimes exit fees. Lenders may offer competitive packages with lower fees.
Mortgage loan : Often has higher fees, including appraisal fees, legal fees and sometimes higher processing fees due to the complexity of commercial transactions.
Loan against property : Can involve higher processing fees, valuation fees, legal charges and sometimes prepayment penalties.
9. Market conditions
Home loan : Interest rates and terms can be influenced by the residential real estate market and economic conditions.
Mortgage loan : Dependent on the commercial real estate market, economic outlook and the specific industry’s performance.
Loan against property : The value of the collateral property can affect the loan amount and terms. Market conditions for the type of property pledged as collateral are important
10. Future financial plans
Home loan : Consider long-term financial stability, job security and future income potential.
Mortgage loan : Assess business growth projections, market trends and the ability to manage repayments alongside business operations.
Loan against property : Evaluate the ability to repay the loan without risking the pledged property and consider future financial needs and potential changes in property value.
Final thoughts
While all three types of loans are used for real estate financing, the key differences lie in their specific purposes, the nature of the collateral and the terms and conditions associated with each type of loan. It’s important for borrowers to carefully consider their financial needs and circumstances before choosing the most suitable loan option.
For personalised advice and to find the loan option to suit your needs, contact Sydney mortgage broker Loan Station to discuss your loan options. Call us on 1300 46 46 11 or info@loanstation.com.au to book a consultation.
