Loan Against Property vs Home Loan: The Real Cost Gap
Both loans are secured by the same flat. One costs Rs 33 lakh in interest, the other Rs 48 lakh, on identical principal over an identical tenure. The difference is not the property. It is what you told the lender you were doing with the money.
A home loan buys a house. A loan against property mortgages a house you already own and hands you cash for anything. Lenders price those two risks very differently, tax law treats them differently, and choosing the wrong one on a Rs 50 lakh borrowing is a Rs 15 lakh mistake.
Key takeaways
- The rate gap is 1.5 to 3.5 percentage points. Home loan floors are advertised between 7.10% and 7.50%; bank LAP cards sit around 8.95% to 11.50%, and NBFCs run to 15%.
- The funding gap is bigger than the rate gap. A home loan funds 75% to 90% of value under the RBI's slabs. A LAP funds 50% to 70%, on the lender's own valuation.
- Tenure is halved. Up to 30 years on a home loan against 10 to 15 years on most LAPs, which is what really drives the EMI difference.
- Tax relief is not comparable. Section 80C's Rs 1.5 lakh principal deduction exists only on a home loan. A LAP gets interest relief only where the money goes into a house or a business.
- Rs 50 lakh over 15 years costs Rs 33.4 lakh in interest at 7.50% and Rs 48.1 lakh at 10.25% — a Rs 14.7 lakh gap on the same property.
- Neither carries a prepayment penalty on a floating rate for an individual borrower, after the RBI's Pre-payment Charges on Loans Directions, 2025.
The two products, side by side
The repo rate has stood at 5.25% through the Monetary Policy Committee's August 2026 review, its fourth consecutive hold. Both products are priced off it with a spread, and the spread is the whole story.
| Feature | Home loan | Loan against property |
|---|---|---|
| What the money can buy | Only the property being funded, or its construction or repair | Anything — business, education, debt consolidation, medical |
| Typical rate | 7.10% to 8.50% at banks | 8.95% to 11.50% at banks, up to 15% at NBFCs |
| Loan to value | 90% under Rs 30 lakh, 80% to Rs 75 lakh, 75% above | 50% to 70%, occasionally 75% on prime residential |
| Maximum tenure | 30 years | 10 to 15 years at banks, up to 20 at housing finance companies |
| Processing fee | 0.25% to 0.50%, frequently capped or waived | Up to 1% at banks, up to 3% at NBFCs |
| Principal deduction (80C) | Up to Rs 1.5 lakh a year | None, ever |
| Interest deduction | Up to Rs 2 lakh (Section 24b, self-occupied) | Only if the money goes into a house or a business |
| Disbursal time | 7 to 15 working days | 15 to 30 working days |
Published rate cards contradict each other badly here. Some lender pages still compute the LAP spread off a 6.50% repo rate that has not applied for several quarters. Aggregators quote home loan floors as high as 8.25% while two large lenders publish 7.15% and 7.25% on their own pages. The floor is real, but it is reserved for a salaried applicant with a score above 800 and a small loan. Assume 30 to 100 basis points above whatever headline you read.
Why a LAP costs more when the security is the same
The flat is identical. The lender's exposure is not.
On a home loan the bank controls the asset from day one: the sale deed is executed with its money, the title documents go into its vault, and the borrower has just put 20% of his own cash into the same property. On a LAP the borrower already owns the flat and is spending its equity on something the bank cannot see or repossess. Loss rates on LAP books have historically run several multiples of home loan books, and the spread is that difference, priced in. The shorter tenure follows the same logic. The deeper mechanics — valuation, which property types get funded, the SARFAESI enforcement timeline — are in our full guide to loans against property.
The tax treatment is where most people get it wrong
Home loan
Under the old regime, Section 24(b) allows up to Rs 2 lakh a year of interest on a self-occupied house, and Section 80C allows up to Rs 1.5 lakh of principal repayment inside the same overall Rs 1.5 lakh ceiling you are already filling with EPF and insurance. On a let-out property the full interest is deductible against rent, but the loss you can set off against other income is capped at Rs 2 lakh a year under Section 71(3A). Under the new regime, neither the 80C principal deduction nor the self-occupied interest deduction is available at all.
Loan against property
There is no principal deduction under any circumstance. Interest relief depends entirely on where the money went, and you have to be able to prove it:
- Into buying, building or repairing a house — Section 24(b) applies, because that section looks at the use of the borrowed capital, not the product name on the sanction letter. The Rs 2 lakh cap applies for purchase or construction of a self-occupied house; for repairs and renewal the cap drops to Rs 30,000.
- Into a business or profession — the interest is an allowable expense under Section 36(1)(iii), with no ceiling, provided the borrowing is genuinely used for business.
- Into a wedding, a car, a holiday, or a personal debt — nothing. No deduction of any kind.
Keep the statement trail showing the disbursal moving into the business current account or the builder's account. Without it the assessing officer has no reason to accept the claim.
The worked example
Take Rs 50 lakh of principal against the same flat, and hold the tenure constant so the comparison is honest.
| Structure | Rate | Tenure | EMI | Total interest |
|---|---|---|---|---|
| Home loan | 7.50% | 15 years | Rs 46,351 | Rs 33.4 lakh |
| Home loan | 7.50% | 20 years | Rs 40,280 | Rs 46.7 lakh |
| LAP, bank | 9.50% | 15 years | Rs 52,211 | Rs 44.0 lakh |
| LAP, typical | 10.25% | 15 years | Rs 54,498 | Rs 48.1 lakh |
| LAP, NBFC | 11.50% | 15 years | Rs 58,409 | Rs 55.1 lakh |
At the same 15-year tenure, the LAP costs Rs 14.7 lakh more in interest at the middle of the band and Rs 21.7 lakh more at the NBFC end. Add the fee difference — 0.25% against 1% to 3% is Rs 12,500 versus Rs 50,000 to Rs 1.5 lakh — and the mortgage stamp duty most states charge on the LAP deed.
The second row is worth a look on its own. Stretching the home loan to 20 years drops the EMI by Rs 6,071 and adds Rs 13.3 lakh of interest. A longer tenure is a cash-flow tool, not a savings tool.
Which one you actually need
The question is not which is cheaper. It is which one your purpose qualifies for.
- Buying a house? A home loan, always — unless the property is one no bank will fund, which is its own warning.
- Building on a plot you own, or extending? A construction loan or a home improvement loan, both of which price at or near home loan rates. Our comparison of plot, construction and home loans covers where each one applies.
- Already have a home loan and need cash? Ask for a top-up first. It typically prices 25 to 100 basis points above your existing rate — 2 to 3 points cheaper than a fresh LAP, with no new mortgage to create.
- Need money for a business or a non-property purpose? This is the one case a LAP wins, and it wins against a personal loan at 11% to 24%, not against a home loan.
One move that rarely works out: taking a LAP on a paid-off flat to fund the down payment on a new one. You carry two EMIs, and the total cost exceeds a single larger home loan. If the down payment is the constraint, the real down payment arithmetic is where to start, not a second mortgage.
Prepayment: the one place they are equal
Under the RBI's Pre-payment Charges on Loans Directions, 2025, lenders cannot levy foreclosure or prepayment charges on floating-rate loans to individuals for non-business purposes, whatever the amount or source of repayment. From 1 January 2026 that extends to floating-rate business loans to individuals and micro and small enterprises sanctioned or renewed on or after that date. Fixed-rate loans stay outside the rule — one more reason to take floating on either product.
That matters more on a LAP, because those borrowers typically have irregular surpluses. Check the sanction letter says floating, and check the reset frequency. Whether to prepay at all or invest the surplus is a separate calculation: we have run the numbers on prepaying versus investing.
FAQ
Can I claim Section 24(b) on a loan against property?
Only if the borrowed money was used for buying, constructing or repairing a house. Section 24(b) tests the use of funds, not the product name. The cap is Rs 2 lakh for purchase or construction of a self-occupied house and Rs 30,000 for repairs. If the money went into a business, claim it under Section 36(1)(iii) instead, with no ceiling.
Is a top-up on my home loan better than a fresh LAP?
Almost always. A top-up prices roughly 25 to 100 basis points above your existing home loan rate, against a LAP at 8.95% to 11.50%. You also skip a second valuation, a second legal report and a fresh mortgage stamp duty. The limit is that the top-up plus the outstanding loan must stay inside the original loan-to-value cap.
Why is my LAP sanction so much smaller than I expected?
Two reasons compound. The loan-to-value is 50% to 70% rather than 80%, and it applies to the lender's own valuation, which commonly lands 10% to 15% below your asking price. A flat you value at Rs 1.4 crore may be valued at Rs 1.2 crore, and 65% of that is Rs 78 lakh.
Does a LAP affect my home loan eligibility later?
Yes, twice. The LAP EMI counts as a fixed obligation and eats into the ratio a future lender applies, and the property is already mortgaged so it cannot serve as security again. On a Rs 55,000 LAP EMI, expect roughly Rs 60 lakh less home loan headroom.
Before you sign
Get three written offers, insist on the Key Facts Statement rather than the brochure, and compare the annual percentage rate — the processing fee and the bundled insurance can add 40 to 60 basis points of effective cost on a LAP. If you are weighing the two against a specific property, send us the numbers and we will tell you which one the file actually fits.
