Home loans and mortgages are almost always interpreted as the same thing.
You could argue that a mortgage is a type of home loan, given that it is a loan used to purchase a home. There are significant differences between the two in terms of their functions and intended applications.
A home loan is more restrictive with regard to how the funds can be used; a home loan can exclusively be used to cover the costs of buying or constructing a home. Conversely, a mortgage can be used for absolutely any purpose if the applicant meets the required criteria for the loan.
In addition, there are various different types of home loans that fall within the broader classification. Examples of this include commercial property loans, non-residential premises loans, construction loans, top-up home loans, home extension loans, home renovation loans, and so on.
Some types of home loans can be taken out alongside a mortgage as a means of funding a specific project. For example, you could take out a home extension loan to cover the costs of an extension. However, it would be expressly forbidden for the funds to be used for any other purpose. If you were to extend your current mortgage to generate capital, it could be used for any legal purpose.
The main differences between home loans and mortgage loans
To help clarify the confusion, what follows is a concise summary of the main properties of the two types of loans and how they differ:
- A home loan is typically issued exclusively for the purchase or construction of a home and cannot be used for any other purpose.
- Home loans are typically issued with a comparatively high LTV, often covering as much as 90% of the property’s purchase or construction costs.
- Cost-effectiveness varies significantly from one lender to the next; interest rates on home loans can be lower than those of a conventional mortgage.
- Borrowing costs can also differ significantly between lenders, typically including an initial processing fee of 0.8% to 1.2% of the total value of the loan.
- Flexible repayment terms are available over the course of anything from 10 to 30 years, in accordance with the preference of the borrower.
- The main difference with a mortgage is that the funds can be used in any way the borrower likes. The loan is issued using their home as collateral in the same way, but there are fewer restrictions placed on how the money can be spent.
- A typical mortgage will be issued with an LTV of around 70% to 80% of the market value of the property. Some lenders have begun once again offering mortgages with an LTV of 90% or even 95% to those who meet the required criteria.
- There are major differences from one lender to the next, but the interest rate payable on a mortgage is usually around 1% to 3% higher than that of a comparable home loan.
- The same also applies to processing fees, which, with the typical mortgage, will be around 1.5% of the total value of the loan.
- With a mortgage, it is usually easier to extend the size of the loan and borrow more money should the initial amount be insufficient to cover all costs and requirements.
Whatever your objectives for the funds you need, it is important to seek independent broker support before applying. This will help you not only determine the most cost-effective option available but also get the best possible deal from an extensive panel of specialist lenders.
If you would like to learn more about the differences between mortgages and home loans, contact a member of the team today.