What Is a Home Equity Loan in India?

A home equity loan, also known as a second mortgage or loan against property (LAP) in India, is a type of secured loan that allows homeowners to borrow money using the equity they have built up in their property as collateral. Equity is the difference between your home's current market value and the outstanding balance on your mortgage.

In India's lending market, home equity loans have become increasingly popular as homeowners seek to unlock the value of their property for various financial needs. Unlike unsecured personal loans, home equity loans typically offer lower interest rates because the loan is secured against your property.

The loan is disbursed as a lump sum amount, and borrowers repay it in fixed monthly installments over a predetermined period, typically ranging from 5 to 30 years. The interest rate is usually fixed for the entire loan term, making it easier to budget for monthly payments.

Understanding Home Equity and LTV Ratios

The Loan-to-Value (LTV) ratio is a critical factor in determining how much you can borrow through a home equity loan. In India, different lenders have varying LTV limits, and these often depend on the value of your property.

The LTV ratio is calculated as: LTV = (Loan Amount / Property Value) × 100

Most banks and housing finance companies in India maintain conservative LTV ratios of 60-75% for home equity loans, though some may go up to 80-85% for borrowers with excellent credit profiles. The lower the LTV ratio, the less risk for the lender and potentially better terms for the borrower.

What Is a HELOC?

A Home Equity Line of Credit (HELOC) is a revolving credit facility that works similarly to a credit card, but uses your home equity as collateral. While traditional home equity loans are less common in India compared to Western markets, understanding HELOCs helps differentiate between fixed-term loans and revolving credit options.

Key Differences:

Home Equity Loan: You receive a lump sum upfront and repay it in fixed monthly installments over a set period. The interest rate is typically fixed.

HELOC: You get a credit line that you can draw from as needed during a "draw period" (usually 5-10 years). You only pay interest on the amount you actually use. After the draw period, you enter a repayment period where you can no longer draw funds and must repay the outstanding balance.

In India, most lenders offer traditional home equity loans (loan against property) rather than HELOCs. However, some financial institutions are beginning to introduce overdraft facilities secured by property, which function similarly to HELOCs.

Home Equity Loan vs Home Loan

Understanding the distinction between a home equity loan and a traditional home loan is crucial for making the right financial decision. Here's a detailed comparison:

Home Equity Loan Explained in Simple Terms

Think of your home as a savings account that grows in value over time. As you pay down your mortgage and as your property appreciates in value, you build equity - this is essentially the portion of your home that you truly "own" outright.

A home equity loan allows you to borrow against this equity. It's like taking out a loan from yourself, using your home as the guarantee. The bank gives you money now, and you pay it back with interest over time. If you fail to repay, the bank can take your property.

7 Reasons Why People Choose Home Equity Loans:

1. Lower Interest Rates: Since the loan is secured by your property, lenders offer rates significantly lower than personal loans or credit cards.
2. Large Loan Amounts: You can borrow substantial amounts based on your home's value, often ranging from ₹10 lakh to several crores.
3. Fixed Payments: Monthly installments remain constant throughout the loan term, making budgeting easier.
4. Longer Repayment Period: Extended tenure options (up to 30 years) reduce monthly payment burden.
5. Multipurpose Use: Funds can be used for any purpose without restrictions from the lender.
6. Faster Processing: Compared to new home loans, approval and disbursement are typically quicker.
7. Potential Tax Benefits: If used for home improvements, interest paid may be tax-deductible under Section 24(b).

Common Uses for Home Equity Loans in India

Homeowners in India utilize home equity loans for various purposes. Here are the most common applications:

• Children's Education: Funding higher education expenses, especially for overseas studies where costs can range from ₹20 lakh to ₹1 crore or more. Lower interest rates compared to education loans make this attractive.
• Business Expansion: Entrepreneurs use home equity to inject capital into their businesses, purchase inventory, or expand operations. The funds provide working capital at competitive rates.
• Medical Emergencies: Covering significant medical expenses for surgeries, treatments, or long-term care that aren't fully covered by insurance.
• Home Renovations: Upgrading or extending your existing property. This use also qualifies for tax benefits on the interest paid.
• Debt Consolidation: Combining multiple high-interest debts (credit cards, personal loans) into a single, lower-interest home equity loan, reducing overall interest burden.
• Wedding Expenses: In India, weddings often involve substantial costs. Home equity loans provide a way to finance these celebrations at lower rates than personal loans.
• Purchasing Additional Property: Using equity from one property to make a down payment or purchase another property outright, building your real estate portfolio.

Advantages of Home Equity Loans

• Lower Interest Rates: Typically 2-4% lower than unsecured personal loans, saving significant amounts over the loan tenure. As of November 2025, rates range from 8.5-11% compared to personal loan rates of 11-16%.
• Higher Loan Amounts: Borrow larger sums based on property value - often ₹50 lakh to ₹5 crore or more, depending on your property's worth and equity.
• Longer Repayment Tenure: Extended repayment periods of up to 30 years reduce monthly EMI burden, improving cash flow management.
• No End-Use Restrictions: Unlike specific-purpose loans, you can use the funds for any legitimate purpose without lender approval or monitoring.
• Fixed Interest Rates: Most home equity loans come with fixed rates, protecting you from market fluctuations and making financial planning easier.
• Tax Benefits: Interest paid on home equity loans used for property improvement or purchase qualifies for deduction under Section 24(b) of the Income Tax Act, up to ₹2 lakh per financial year.
• Faster Processing: Since the property is already owned and valued, approval processes are typically quicker than new home loans, with disbursement in 7-15 days.

Disadvantages and Risks

• Risk of Foreclosure: Your home serves as collateral. If you default on payments, the lender can seize and sell your property to recover the loan amount, leaving you homeless.
• Reduced Home Equity: Taking a home equity loan decreases your ownership stake in the property, limiting future borrowing capacity and reducing net worth.
• Higher Interest Than Primary Mortgages: While lower than personal loans, home equity loan rates are typically 0.5-1.5% higher than first home loan rates.
• Closing Costs and Fees: Processing fees (0.5-2% of loan amount), legal charges, valuation costs, and documentation fees can add up to ₹50,000-2,00,000 or more.
• Market Risk: If property values decline, you could end up owing more than your home is worth (negative equity), making it difficult to sell or refinance.
• Long-Term Debt Burden: Extended tenure means you'll be in debt for longer, potentially well into retirement years, affecting financial freedom.
• Temptation to Overspend: Easy access to large sums can lead to unnecessary expenses or lifestyle inflation, defeating the purpose of responsible borrowing.
• Impact on Credit Score: Taking on additional debt increases your debt-to-income ratio. Late or missed payments severely damage credit scores, affecting future borrowing ability.

Current Interest Rates (November 2025)

Interest rates for home equity loans in India vary based on the lender, loan amount, tenure, and borrower's credit profile. Here's an overview of current rates from major lenders:

Note: These rates are indicative and subject to change based on RBI policy rates, market conditions, and individual borrower profiles. Borrowers with excellent credit scores (750+) and stable income typically receive rates at the lower end of the spectrum.

Tax Benefits of Home Equity Loans in India

Understanding the tax implications of home equity loans is crucial for maximizing your financial benefits. The Income Tax Act of 1961 provides specific provisions for home equity loans used for certain purposes.

Section 24(b) - Interest Deduction

If you use your home equity loan for the purchase, construction, renovation, or repair of a residential property, the interest paid on the loan is eligible for tax deduction under Section 24(b) of the Income Tax Act.

Important Conditions:

• The loan must be taken for purchase, construction, repair, renewal, or reconstruction of the residential property
• The property should not be sold within 5 years of possession; otherwise, the entire deduction claimed will be added back to income in the year of sale
• You must have the possession certificate or completion certificate for claiming full deduction
• During the construction period (before possession), pre-construction interest is allowed as deduction in 5 equal installments

Example Tax Savings:

If you're in the 30% tax bracket and claim the maximum deduction of ₹2 lakh:

Annual Tax Savings = ₹2,00,000 × 30% = ₹60,000

Over a 20-year loan period, this could result in total tax savings of ₹12 lakh!

Note: If the home equity loan is used for purposes other than property-related expenses (such as education, business, or personal use), the interest paid is NOT eligible for tax deduction under Section 24(b). However, if used for business purposes, it may be claimed as a business expense under different provisions.

How to Apply for a Home Equity Loan in India

The application process for a home equity loan is relatively straightforward. Here's a step-by-step guide:

1. Assess Your Equity and Requirements: Calculate your home equity by subtracting your outstanding mortgage from your property's current market value. Determine how much you need to borrow and ensure it falls within the typical LTV limits (60-85%).
2. Check Your Credit Score: Obtain your credit report from CIBIL, Experian, or Equifax. A score above 750 significantly improves your chances of approval and better interest rates. Address any discrepancies before applying.
3. Research and Compare Lenders: Compare interest rates, processing fees, tenure options, and prepayment charges across multiple banks and financial institutions. Use online comparison tools or consult with a financial advisor.
4. Gather Required Documents: Collect all necessary documentation including property papers, existing loan statements, income proof, identity proof, address proof, and recent bank statements (typically last 6 months).
5. Submit Application: Fill out the loan application form either online through the lender's website or offline at a branch. Provide accurate information to avoid delays in processing.
6. Property Valuation: The lender will arrange for a professional valuation of your property by an approved valuer. This typically takes 3-5 days. The valuation report determines the loan amount you're eligible for.
7. Legal and Technical Verification: The bank's legal team will verify your property documents to ensure clear title and no legal disputes. Technical evaluation confirms the property's structural soundness.
8. Loan Approval and Disbursement: Once all verifications are complete and you meet the eligibility criteria, the loan is sanctioned. After signing the loan agreement and completing registration formalities, funds are disbursed to your account, typically within 7-15 working days from application.

Eligibility Criteria for Home Equity Loans

While specific eligibility requirements vary by lender, here are the general criteria that most banks and financial institutions follow:

Required Documents:

• Identity Proof: PAN Card, Aadhaar Card, Passport, Voter ID, or Driving License
• Address Proof: Aadhaar Card, Passport, Utility Bills, or Rental Agreement
• Income Proof: Last 6 months' salary slips, bank statements, ITR for last 2-3 years, Form 16
• Property Documents: Sale Deed, Property Registration documents, Previous loan documents, Latest property tax receipt, Approved building plan
• Existing Loan Details: Loan account statements, Sanction letter, Repayment track record
• Business Documents (for self-employed): Business registration proof, GST registration, Audited financial statements

Frequently Asked Questions (FAQ)