When looking to buy a house, save up for a large property expense, or get hold of some money against your property, you’ll likely come across the terms ‘home loan’ and ‘mortgage loan’. Whilst there are similarities between the two, they aren’t the same.
Understanding the difference between the two could help you decide what loan to go for, know how much you’ll be paying back and prevent you from getting into any unnecessary costs. The main difference comes down to the use of the loan, whilst a home loan is typically used to buy/build/renovate a residential property, a mortgage loan is when an owner can borrow money against their property.
Let’s look at how they work and their differences. Which one may be the best choice for you?
What Is a Home Loan is a secured loan taken out for a residential purpose. Home loans are often used when the borrower wants to buy a new or second hand house, build a home on land they own or renovate their existing property.
The lender will give the borrower a large sum to help them with buying/ building their property. The borrower will then pay the loan back in instalments per month over an agreed amount of time. Usually, the property will be used as security for the loan. If the borrower doesn’t pay back the loan, the lender may legally claim their money back, by taking ownership and selling the property.
Home loans typically have a long repayment period of 10-30 years. As the property is for residential use and the loan has a specific purpose, the interest rates may be lower than a lot of other secured loans.
Typical uses of a Home Loan include:
Buying a move in property
Buying a property in build
Building a home on owned land
Purchasing a plot of land (depending on the lender)
Renovating/upgrading an existing home
Moving an existing home loan to a new lender
Depending on the institution, the properties uses, LTV, interest rate and eligibility criteria will vary.
What Is a Mortgage Loan?
A mortgage loan is a loan that is secured against an owned property. In many markets, this can be used to refer to any loan where real estate is used as security. However, it is often used to describe borrowing money by putting up your residential/commercial property.
Whilst not necessarily used to purchase another property, the money can typically be used for any purpose. This is one of the main differences between a mortgage loan and a home loan. For example, if you have a fully paid for property and need money to expand your business, you may put up your property as security and take out a mortgage. Whilst still owning the property, the lender will have a legal interest in the property until it has been paid off.
Mortgage loans may have longer repayment periods than unsecured loans and can give you access to a fairly large amount of money. However, the interest rates and terms will depend on the value, location, legality and the borrower’s income and credit.
Home Loan vs Mortgage Loan
Now let’s look at the key differences between a home loan and mortgage loan.
1. Use of the Loan
Home loan – Specifically for residential purposes. Can help borrowers purchase/build/upgrade their property.
Mortgage loan – Typically used to gain money against an owned property. Can be used for many purposes including personal/educational/business/medical.
2. Ownership of Property
Home loan – The borrower may not own the property. Can help with purchasing/building.
Mortgage loan – The borrower will typically own the property. The property will need to be clear and legal.
3. Use of Money
With home loans, the money is typically given directly to the seller/builder/contractor depending on the stage of the property. The lender may want to ensure the money is being used correctly.
With a mortgage loan, the money tends to be much more flexible. Once approved, the borrower can use the money for whatever is allowed by the lender.
4. Interest Rates
Due to the loan being used for residential purposes, the interest rates can be fairly low.
Mortgage loans can have higher interest rates than home loans. This is due to the lender assessing how good the property is, the borrower’s ability to repay and what the money will be used for.
5. LTV
The LTV shows how much the lender will want to lend compared to the value of the property. Home loans may have a higher LTV as they will be able to lend a higher percentage of the purchase price within the regulations.
Mortgage loans may have a lower LTV as the lender may want to be more cautious with giving money against an owned property.
6. Tax
Home loans may have tax benefits on the eligible principal and interest payments. Depending on the country and the purpose of the property, this can apply. Mortgage loans may have different rules. If the money is being used for business, this can affect how it is treated.
Tax can change and depend on your situation. It is always best to speak to a tax professional to find out the best options.
7. Risk
Both loans are secured. If the borrower fails to make payments and defaults, the lender may claim their security.
With home loans, the risk will typically be around the new property. With a mortgage loan, the borrower is risking their owned property which may be fully paid for and being used by their family/business.
Advantages & Disadvantages of a Home Loan
A home loan means the borrower can become a homeowner. They won’t have to pay the full price of the property straight away. Home loans can have long repayment periods meaning the monthly payments can be easier to manage. They can also have more competitive rates and tax benefits.
However, it can be a long term financial commitment. The borrower will need to pay a deposit, registration and processing fees. They will also have to pay the interest over many years. There can also be issues with the property being delayed in construction, legal issues or value changes.
Advantages & Disadvantages of a Mortgage Loan
A mortgage loan can give property owners the chance to gain value from their property. It can be useful for expanding a business, emergency costs, education or to consolidate expensive debts. As it is secured, it may be able to give a larger loan with a longer repayment period than an unsecured personal loan.
The main disadvantage is that you risk losing your owned property. Mortgage loans can also have valuation, legal and documentation fees. You shouldn’t take out a large mortgage loan to spend unnecessarily as you are risking your property until it has been paid off.
Which One Should I Go For?
It will depend on what you want to achieve financially.
If you want to buy/build/renovate a residential property, a home loan would be best. They are typically more suitable for someone wanting a long term repayment period with potentially lower interest rates.
If you own a property and want to gain money for a wider purpose, a mortgage loan may be best for you. They may be suitable if you need a larger loan than an unsecured loan and are okay with putting up your property as security.
Before applying, look at the interest rates, fees, flexibility of repayments, foreclosure rules, loan length and processing. Work out the monthly payments and ensure it fits into your income. It is also wise to have an emergency fund so if unexpected costs arise you won’t miss payments.
Final Thoughts
The main difference between home and mortgage loans is the purpose. A home loan is used to help purchase/build/upgrade a home. A mortgage loan is used to gain money against an owned property.
Both can be useful if used responsibly, however can risk you losing the property if you fail to pay seriously. It is important to understand the interest rates, LTV, fees, tax and repayments. Carefully considering the options and realistically looking at your finances will help you decide what loan is best to help achieve your long term goals.
