When considering property purchase in Dubai, it’s important to understand the different financing options available. We want to provide clarity on conventional home loans and loans against existing property.
Our goal is to help you distinguish between these approaches so you can determine the most suitable financial strategy for your needs.
Difference between Home Loan and Loan against property
Here we wanted to provide a clear distinction between two common types of financing available in the UAE property market: home loans and loans against property. Understanding the difference is crucial when considering your financial options related to real estate.
Home Loan
A home loan in Dubai can help you achieve your property ownership goals, whether you are buying an apartment or land. Essentially, it covers the difference between your savings and the property’s full cost, making acquisition easier.
A home loan, as the name suggests, is specifically designed to facilitate the purchase of a residential property. This includes various types of properties such as houses, apartments, or even plots of land intended for building a home. The funds obtained from a home loan are directly used to finance the acquisition of the property you wish to own.
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Loan against property
Loan Against Property (LP) is a secured loan where your property acts as collateral. While you own the property, it is at risk if loan terms aren’t met. Due to its secured nature, LAP often allows larger loan amounts with better interest rates than unsecured loans.
Understanding the differences between home loans and loans against property is important for your real estate and financial planning in the UAE. Each has unique features that impact property purchase and leveraging existing property.
Let’s examine the specifics of both options to help you make informed decisions aligned with your goals.
Home Loan Vs Loan against property
Features of Home Loan
- Loan against property
- Payment of loan
- Unsecured Loan
- Loan against property
UAE property loans present a valuable opportunity to utilize your real estate holdings for your financial objectives. By taking out a loan against your property, you can unlock the capital that is currently invested in it. This access to funds can be strategically employed for various purposes, such as making new investments or expanding your business ventures. Leveraging your property in this way can provide a distinct advantage, enabling you to effectively seize promising opportunities as they arise.
- Payment of loan
It is important for you to understand that if you encounter any difficulties in repaying the loan according to the agreed-upon schedule, financial institutions within the UAE have the legal right to begin foreclosure proceedings against the property.
To prevent such circumstances from arising, it is strongly recommended that you ensure all your loan repayment obligations are met in a timely and consistent manner.
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- Unsecured Loan
The key aspect to understand is that the property you are purchasing with the loan acts as the direct collateral. What this means is that the bank or financial institution providing the mortgage holds a legal claim against the property until the full loan amount has been repaid according to the agreed-upon terms. This arrangement provides security for the lender and is a standard and fundamental aspect of how mortgage financing works.
Features of Loan against property
- Usage Protean
- Secured Loan
- Usage Protean
Protean means the ability to change different forms. The loan against property may be utilised for many different purposes like personal use, business development and other usages. It is important to note that the distinction between loans against property and traditional mortgages is the utilization of property as collateral and loan purposes are different.
Traditional mortgages are specifically designed to finance the purchase of a property. The borrowed funds are used to acquire ownership of the real estate.
- Secured Loan
It’s important to understand that these loans are structured as secured debts. When a mortgage is obtained to finance a property acquisition, the property itself acts as collateral for the loan. Consequently, should the borrower be unable to fulfill the agreed-upon repayment terms, the lender is legally entitled to take possession of the property to recoup the outstanding balance.
This is a common procedure in secured lending, and it emphasizes the need to carefully consider and ensure that the loan terms, including interest rates and repayment schedules, are both manageable and sustainable for you throughout the entire mortgage period. It is crucial to have a clear understanding of your financial capacity to meet these obligations to avoid potential complications.
How to choose the Loan?
Understanding the fundamental differences between home loans and loans against property is essential for sound financial planning. As you have correctly pointed out, while both financial products utilize property, their intended purposes and operational mechanisms diverge considerably, making it important to distinguish between them when considering financial options.
Home loans are specifically created to facilitate the purchase of residential properties. Financial institutions that provide these loans establish terms and conditions that are inherently linked to the acquisition of a home. This typically involves detailed property appraisal procedures focused on the specific property being acquired, and the funds obtained are exclusively designated for this purpose, limiting their use for alternative needs.
Conversely, loans against property offer a broader spectrum of applications. These loans enable individuals to secure financing for diverse financial requirements. Whether the objective is to support business growth, finance advanced education for family members, or consolidate existing debts for improved financial organization, a loan against property can serve as a versatile financial tool.
The loan amount for such instruments is generally based on a specified percentage of the property’s prevailing market value, thereby providing a degree of financial adaptability that is directly related to the value of the collateral asset.
Take away
When considering purchasing a home or leveraging your property’s value in the UAE, it’s important to understand the distinctions between home loans and loans against property.
Taking the time to carefully evaluate your individual needs, repayment capabilities, and the specific reason for borrowing will help you make a well-informed decision that aligns with your financial objectives.
About the author
Vinay Kumar Goguru is a finance professional with more than 8 years of diverse experience as a researcher, instructor and Industry work experience with both public and private entities. Prior to MyMoneySouq, he spent 6 years in Berkadia, It's a commercial mortgage banking company. He has a "Doctoral Degree in Commerce" and two master's degrees with a specialization in Finance, one as Master of Commerce and other as Master of Business Administration. He has written several articles on personal finance, published by different International journals. He loves traveling, reading and writing is his passion. He has a dream of writing a book on his favorite finance topics.
