One can be faced with the need for emergency funds at any time. That is what asset management is for. Your assets are your fallback plan in case of emergency. In India house property is an important part of asset management. It is for such emergencies that elders always insist on acquiring a housing property. Banks offer various finance options for people owning property. They come with nominal interest rates and repayment tenures to meet your emergency liquidity needs. 

There are two main types of loans one can avail against their property – Mortgage loans and Home Equity Loans. 

Mortgage loans are offered against freehold and fully constructed residential or commercial properties. 

Home equity loan is a loan available to you against the equity you hold in a property. Also known as an equity loan, a second mortgage or a home-equity instalment loan, this is a form of consumer debt. 

This article aims at elucidating the difference between these two loan types, their key highlights and the pros and cons of them. 

Mortgage Loans

As stated above, this is a kind of personal loan one can avail by pledging their property. Remember that this loan can be availed only against freehold and fully constructed properties. The loan amount can be used for personal or business uses as per the borrower’s needs. Let us have a look at some of its features – 

  • They are considered secured loans and come with lower interest rates as the property is pledged as collateral

  • These can be availed by both salaried and self-employed individuals

  • You need to have a good credit standing & repayment history to avail this loan

  • They are a type of personal loan as the loan amount can be used for any purpose without any restriction

  • The mortgaged property continues to be in your possession while you are repaying the loan

  • Speedy approvals place the funds in your hands at the earliest

  • Banks offer attractive balance transfer facilities on your existing mortgage loans

Different types of mortgage loans

Mortgage loans are usually of 3 types:

  1. Regular mortgage loans against property: This is the most common one where the borrower pledges their property and avails a loan to fulfil any kind of personal or business needs. One can avail up to 75% of the property value as loan amount. 

  2. Overdraft facility against the property: This facility is suitable for self-employed professionals who anticipate surplus income or fluctuating income during the year, which they are able to pool back in to their loan account. They are able to park their surplus money in the account for as short as a few days and enjoy reduced interest liability. 

  3. Top-up loan on existing property loan: A home loan top up is another way to accumulate funds in a short period. One can approach the same bank or go for a balance transfer of the existing home loan to a new lender and in the process acquire a top up loan with attractive offers. This loan can be used for home renovation, expansion or other personal and business uses too. The top up loan amount is determined based on your current outstanding and the current market value of the property. 

Mortgage Loan Interest Rates Offered By Various Banks

 Lender  Interest Rate (p.a.)  Loan Amount  Loan Tenure
 HDFC Bank  9.65% Onwards  Up to 60% of the mortgaged property’s market value   Up to 15 years
 ICICI Bank  10.20% (floating rate)
11.95% (fixed rate) Onwards		 Up to Rs.5 crore Up to 15 years
State Bank of India (SBI) 10% Onwards Up to Rs.7.5 crore Up to 15 years
Axis Bank 11% Onwards Up to Rs.5 crore Up to 20 years
Citibank 8.75% Onwards Up to Rs.5 crore Up to 15 years
Canara Bank 11.65% Onwards Up to 50% of the property’s value or
Rs.10 crore, whichever is lesser		 Up to 7 years
HSBC Bank 9.80% Onwards Up to Rs.10 crore Up to 15 years
PNB Housing Finance 10.50% Onwards Up to 60% of the property’s market value Up to 15 years
Syndicate Bank 11.85% Onwards Up to 50% of the property’s market value Up to 10 years
IDFC Bank Up to 11.80% Up to Rs.5 crore Up to 15 years
Karur Vysya Bank 12.15% Onwards Up to Rs.3 crore Up to 100 months
Union Bank of India 11.50% Onwards Up to Rs.10 crore Up to 12 years
IDBI Bank 10.7% Onwards Up to Rs.10 crore Up to 15 years
Oriental Bank of Commerce 11% Onwards Up to Rs.10 crore Up to 10 years
Federal Bank 11.90% Onwards Up to Rs.5 crore Up to 15 years
Corporation Bank 13.35% Onwards Up to Rs.5 crore Up to 10 years
Vijaya Bank 11.90% Onwards Up to Rs.5 crore Up to 10 years

Home Equity Loans

A home equity loan is a loan offered based on the equity you possess on the property. 

Susheel & Diya are a middle class couple with decent jobs. They are suddenly faced with a fund crunch. They are apprehensive about withdrawing their savings as it would eat into their kids’ education funds. They are not considering their PPF savings as it is their primary retirement plan. The only other option they are left with is getting a Home Equity loan against their residential property. Though they are still repaying the home loan for this property, they are sure that they can obtain a higher loan amount since this loan is determined based on the current market value of the property. The bank will consider the market value of the property minus the outstanding amount and offer a loan amount. They can still get a repayment tenure of up to 15 years and low interest rates, thus not putting a huge burden on their monthly cash outflow. 

Key Features Of A Home Equity Loan

  • They are secured by the collateral provided by the property

  • Is offered against fully constructed freehold properties, both residential and non-residential

  • Come with lower interest rates compared to personal loans

  • Places funds in your hands quickly

  • Usually come with fixed interest rates

  • No restriction on the end use of the loan amount

  • Can be availed even by persons with low credit score as it is provided against your property as collateral

  • Home equity loans are not eligible for tax benefits unlike home loans

Different Types Of Home Equity Loans

There are 2 types of home equity loans – Fixed Rate loans & Home Equity Lines of Credit (HELOC)

Fixed rate loans are the basic home equity loans, where a lump sum loan amount is paid to the borrower. They repay the loan amount over the repayment tenure with fixed interest rates. The interest rates do not fluctuate based on market conditions and stay the same throughout the loan tenure. 

Home Equity Lines of Credit (HELOC) are similar to an overdraft facility or a line of credit based on your eligibility. This is similar to a revolving line of credit and may be given as a credit card allowing borrowers to use only as much as they need. Repayment amount will be based on the withdrawn amount and the respective interest rates. You can reborrow the amount you have repaid and at the end of the loan term, the entire amount must be repaid. 

How To Calculate Home Equity Loan Amount?

Equity = Current value of the house – The total outstanding amount payable on the existing loan on the property

Home equity loan amount is determined based on the current value of the property minus your liability towards the property. 

For example, if you bought a house worth Rs.60 lakh and have taken a loan for Rs.35 lakh, then the current equity of your house will be Rs.25 lakh. Now, let us say in the next 10 years, the value of the property raises to Rs.75 lakh, and your liability on the property is now only Rs.20 lakh, then the equity is Rs.55 lakh. 

So, the equity of the home keeps increasing with an increase in the house value and may also decrease if the property value decreases. If your liability is zero, then the equity will be the market value of the house. 

Mortgage Loans VS Home Equity Loans

So, which one should I opt for? A mortgage loan or a home equity loan?

Both mortgage loans and home equity loans offer quick loan disbursal to meet emergency liquidity needs. They are both secured by the property being placed as a collateral and hence come with lower interest rates. However, a home equity loan is based on the current market value of the property and therefore can offer higher loan amounts compared to mortgage loans. Mortgage loans are more of a need based loans where you keep your property as collateral for the loan amount you need. It also comes with floating interest rates which might benefit the borrower based on market fluctuations. Irrespective of the loan type you opt for, both these loan types help to place a huge lump sum of money in your hands in a short period of time. 

Conclusion:

Be it mortgage loans or home equity loans, banks and NBFCs offer loans starting from Rs.5 lakh to Rs.10 crore. Choose the right bank and the right loan type based on your needs and repayment capacity. You could also consider balance transfer of existing loans to a different lender if you are looking for better terms and attractive offers. A top-up loan might come in handy if you are looking for smaller loan amounts.