Loan against property vs home loan: how rates, borrowing limits, prepayment and tax compare

Rules and rates as of 18 October 2026.

A home loan and a loan against property (LAP) both put a house on the line as security, and both can show up in the same bank's app. They are built for different jobs, though, and the differences show up in three places: how much you can borrow, what you pay, and whether the tax law gives you anything back. This explainer goes through each, with one worked example.

What each loan is for

A home loan pays for a house you are buying or building. The bank lends against the flat being bought, and the money goes to the seller or builder. The RBI's Master Circular on Housing Finance (3 April 2023) lists the purposes banks may treat as housing finance, among them buying or building a dwelling unit, a second house, and repairs to damaged dwelling units.

A loan against property works the other way round. You already own a house, flat or commercial unit; you mortgage it and borrow for something else, such as a business, a child's education or another purchase. The lender's question is what the property is worth and whether you can repay, not what you will do with the money. The housing-finance circular does not deal with LAP at all.

How much you can borrow

For home loans the RBI ties the loan-to-value (LTV) ratio to the size of the loan. In the Master Circular's table (para 3(a)), the highest LTV band is under 90% for loans up to ₹30 lakh, under 80% for loans above ₹30 lakh and up to ₹75 lakh, and under 75% above ₹75 lakh. Stamp duty, registration and documentation charges cannot be counted in the property's cost when working out the LTV, unless the house costs ₹10 lakh or less.

We found no equivalent RBI ceiling for LAP in the documents we read. The share of the property's value a lender will advance is set by its own board-approved policy, so it varies from lender to lender. Ask for it in writing before you apply.

Rates and resets: mostly the same rules

The RBI's repo rate has been 5.50% since 7 October 2026. Under the Commercial Banks – Interest Rates on Advances Directions, 2025 (28 November 2025), all floating-rate "personal or retail loans (housing, auto, etc.)" and floating-rate loans by banks to MSMEs must be linked to an external benchmark (para 25). The rate must be reset at least once every three months (para 38). The credit-risk part of the spread can change only if your credit assessment changes substantially, and the other parts of the spread only once in three years (para 33).

Read together, a floating-rate home loan from a bank is repo-linked, and a floating-rate LAP from a bank, whether taken as a retail loan or as an MSME loan, should be too. That is our reading of para 25; the sanction letter will name the benchmark. Housing finance companies and NBFCs set their own reference rates, so the timing of a change is in the lender's terms, not in these directions.

What differs is the spread. The lender decides it, and it decides tenure as well; no RBI document we read fixes either for LAP. Compare the two spreads on the lender's rate card rather than the headline rate.

Prepaying

The Pre-payment Charges on Loans Directions, 2025 (2 July 2025) apply to loans sanctioned or renewed on or after 1 January 2026 (para 3(ii)). Under para 5(i), no lender covered by them may charge for prepaying a floating-rate loan given to an individual for a purpose other than business. That covers a floating-rate home loan, and a LAP taken for, say, education.

A LAP taken for a business is treated separately (para 5(ii)). Commercial banks (other than small finance, regional rural and local area banks), Tier 4 urban co-operative banks, upper-layer NBFCs and all-India financial institutions cannot charge at all. Small finance banks, regional rural banks, Tier 3 urban co-operative banks, state and central co-operative banks and middle-layer NBFCs cannot charge on loans sanctioned up to ₹50 lakh, but may above that. Fixed-rate loans are outside these rules; read the agreement.

Tax: it follows what the money is used for

Under the Income-tax Act, 2025, in force since 1 April 2026, interest on a loan for a house sits in section 22 (formerly section 24(b) of the 1961 Act). Section 22(1)(b) allows interest "where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital". For a house you live in (the nil-annual-value houses under section 21(6), up to two), section 22(2)(a) caps the deduction at ₹2,00,000 a year, provided the purchase or construction is completed within five years from the end of the tax year of borrowing and you file a certificate from the lender. Otherwise the cap is ₹30,000 (section 22(2)(b)).

Principal repayment can count under section 123 (formerly 80C), within its ₹1,50,000 limit. Schedule XV, para 3 requires the money to have been borrowed for buying or building a residential house from listed lenders, which include banks, co-operative banks, LIC, the National Housing Bank and eligible housing finance companies.

Both reliefs are for the old regime only. Section 202(2)(a)(v) bars the section 22(1)(b) interest deduction on the section 21(6) houses, and section 202(2)(a)(xii) bars Chapter VIII deductions, which include section 123, in the new regime.

Notice that section 22 speaks of the property being bought or built "with borrowed capital". It does not ask what the loan is called. Our reading is that LAP money used to buy or build a house can qualify for the interest deduction, and LAP money spent on education, a wedding or a car cannot. Whether LAP principal qualifies under Schedule XV, and how interest on a LAP used in a business is treated as a business expense, are questions for your chartered accountant, with the bank's end-use certificate in hand.

Worked example: ₹30 lakh over 15 years

Take ₹30 lakh borrowed for 15 years (180 months). Assume a home loan at 8.00% (repo 5.50% plus a 2.50% spread) and a LAP at 9.50% (repo plus 4.00%). Both spreads are illustrative assumptions, not any lender's rate.

EMI = P × r × (1 + r)ⁿ ÷ [(1 + r)ⁿ − 1], where P is the loan, r the monthly rate (annual rate ÷ 12) and n the number of months.

• Home loan: r = 8 ÷ 1,200 = 0.006667. EMI = ₹28,670. Total paid ₹28,670 × 180 ≈ ₹51.6 lakh, of which interest is about ₹21,60,521.
• LAP: r = 9.5 ÷ 1,200 = 0.007917. EMI = ₹31,327. Interest over the term is about ₹26,38,813.
• Difference: ₹2,657 a month, or about ₹4,78,292 over 15 years.

Tax, if the home loan buys a flat you live in and you are in the old regime at the 30% slab: first-year interest works out to ₹2,36,099. Only ₹2,00,000 is deductible under section 22(2)(a), worth ₹2,00,000 × 30% = ₹60,000 before cess. If the LAP pays for something other than a house, there is no section 22 deduction at all.

₹30 lakh, 15 years	Home loan at 8.00%	LAP at 9.50%
Monthly EMI	₹28,670	₹31,327
Total interest	₹21,60,521	₹26,38,813
Year-1 interest	₹2,36,099	₹2,80,935
Year-1 principal repaid	₹1,07,935	₹94,986
Section 22 interest claim, self-occupied, old regime	Up to ₹2,00,000	Only if the money bought or built a house (our reading)
Prepayment charge, floating rate, non-business	Nil (loans from 1 Jan 2026)	Nil (loans from 1 Jan 2026)

The figures were computed in Python from the formula above; year-1 figures assume 12 EMIs from the first month.

Where that leaves a borrower

If you are buying a house, a home loan has the clearer tax position; compare its spread with the LAP spread the same lender quotes you. A LAP gives you money for any purpose against a house you already own, but costs more in our example and loses the house-property deduction when spent on something else. Either way, the property can be sold by the lender if you default, so borrow what the EMI comfortably allows. A chartered accountant can confirm the tax treatment for your case before you sign.