mortgage loan vs home loan

By Rajesh Kumar, Senior Commercial Lending Manager with 12 years of experience at HDFC Bank and ICICI Bank. Former underwriter at State Bank of India Commercial Banking and current financial consultant specializing in real estate financing.

Here’s what I’ve learned from watching thousands of Indian investors make this expensive mistake.

The day I watched someone lose their dream property deal

Last month, I sat across from Priya Sharma, a successful textile business owner from Bangalore who wanted to buy her second rental property in Whitefield. She walked into our commercial lending office and said, “I need a home loan for this investment property.”

Those eight words almost killed her ₹1.2 crore deal.

Why? Because Priya didn’t understand that “home loans” and “mortgage loans” aren’t the same thing when you’re investing in real estate. This confusion happens every single day in banking halls across India, and it’s costing investors serious money.

According to the Reserve Bank of India’s latest Housing Finance Companies report, over 55% of first-time commercial borrowers initially inquire about residential loan products for investment properties – creating delays that cost an average of ₹2.5 lakhs per transaction in extended interest rates and opportunity costs.

What you need to know right now

If you’re buying investment property in India, you need to understand this: the moment you step outside of buying a home where you’ll actually live, you’ve entered a completely different world of lending.

Here’s what changes immediately:

• Your interest rates jump 1% to 3% higher (that’s ₹50,000 to ₹1.5 lakhs more per year on a ₹50 lakh loan)
• You’ll need a 30-40% down payment instead of 10-20% for home loans
• Banks will care more about your property’s rental income than your salary
• The approval process takes 60-120 days instead of 30-45 days

Source: RBI Annual Report on Housing Finance, FY 2023-24

Who gets caught in this trap

You’re at risk if you’re:

• Buying your second, third, or fourth rental property
• Purchasing commercial spaces for your business
• Investing in apartment buildings or office complexes
• Buying property through your company or LLP

The National Housing Bank reports that 18% of all property purchases in India in 2024 were investment properties, yet most investors still approach banks asking for “home loans.”

What actually separates these loan types in India

Let me break this down in simple terms. When you get a “home loan” in India, you’re getting a loan for your primary residence with benefits like:

• Income tax deductions under Section 80C and 24(b)
• Lower interest rates (currently 8.5% to 10.5%)
• Longer repayment periods (up to 30 years)
• Processing fees as low as 0.5% of the loan amount

Commercial property loans work totally differently. According to the Indian Banks’ Association guidelines, these loans are:

• Priced based on your business income and the property’s rental yield
• Subject to different RBI regulations
• Taxed differently under the Income Tax Act
• More expensive but offers business tax benefits

Here’s what happened to Priya (and what you can learn)

Priya came prepared with her salary slips, Form 16, and ITR – exactly what you need for a home loan. But commercial lenders wanted completely different documents:

• Rental agreements from her current property
• Business financial statements for the last 3 years
• Property valuation report from approved valuers
• NOC from society for commercial use (if applicable)

“I felt like I was applying for a business loan, not a property loan,” Priya told me. “Everything I thought I knew about getting a home loan was useless.”

This disconnect is backed by data. The Banking Codes and Standards Board of India’s 2024 report shows that 45% of commercial loan applications are initially rejected due to incomplete documentation because borrowers prepare home loan paperwork.

The regulatory reality you’re dealing with

The RBI’s Master Direction on Housing Finance, updated in April 2024, clearly separates residential and commercial property financing. Home loans are governed by priority sector lending norms, while commercial property loans fall under general banking regulations.

Key RBI guidelines you should know:

• Loans above ₹75 lakhs for non-residential properties require higher provisioning by banks
• Commercial property loans don’t qualify for priority sector benefits
• Different risk weights apply (75% for home loans vs 100% for commercial property)

What this means for you: Banks can offer flexible repayment structures for commercial loans, including interest-only periods and balloon payments. But you’ll pay higher rates and get fewer regulatory protections.

Current market conditions are making this worse.

Right now, the gap between home loan and commercial property loan rates has widened significantly. RBI data from August 2024 shows:

• Average home loan rate: 9.15%
• Average commercial property loan rate: 11.75%
• Historical spread: Usually 1%, now 2.6%

Why the bigger gap? New Basel III norms implemented by RBI require banks to maintain higher capital for commercial property loans. As reported in Business Standard last month, PSU banks have become more selective, forcing borrowers toward NBFCs and private banks with higher rates.

The tax implications most investors miss

Here’s something crucial most people don’t realize: the tax treatment is completely different.

Home loan benefits:

• ₹1.5 lakh deduction under Section 80C for principal repayment
• ₹2 lakh deduction under Section 24(b) for interest (₹5 lakh for first-time buyers)
• No tax on notional rent for second home

Commercial property loan reality:

• Interest is fully deductible as a business expense
• Depreciation benefits on commercial property
• But no Section 80C benefits
• Rental income taxed as business income

CA Meera Jain from Deloitte India, with 10 years of real estate tax experience, explained: “Smart investors structure their deals based on tax implications. Sometimes commercial loans save more money despite higher interest rates.”

State-specific challenges you need to know

Different states have different rules that affect your lending options:

Maharashtra: Requires NOC from local authority for commercial use of residential properties. Karnataka: RERA registration mandatory for commercial property transactions above ₹50 lakhs
Delhi NCR: Circle rate variations can impact loan-to-value ratios significantly. Tamil Nadu: Additional stamp duty for commercial properties can increase funding needs

The strategic advantage most Indian investors miss

Portfolio lenders like Bajaj Housing Finance and Piramal Capital offer “business purpose” home loans that bridge residential and commercial financing.

Amit Patel, Regional Manager at HDFC Bank Commercial Banking with 8 years of experience, told me: “Savvy investors use home loans for their first 1-2 investment properties, then switch to LAP (Loan Against Property) or commercial loans for larger deals.”

The ASSOCHAM Real Estate Investment Survey 2024 found that investors using this strategy save ₹3-5 lakhs annually compared to those using commercial financing for all investment properties.

How to avoid Priya’s mistake

Before you walk into any bank, know which type of loan you actually need:

You probably want a home loan if:

• You’re buying your second home (even for investment)
• The property is residential and under ₹75 lakhs
• You want maximum tax benefits
• You’re an individual buyer (not company/LLP)

You definitely need a commercial property loan if:

• You’re buying office space, shops, or industrial property
• Your company/LLP is purchasing the property
• You need the property for business operations
• The loan amount exceeds ₹1 crore

The documentation checklist that saves time

For home loans:

• Last 3 months’ salary slips
• Form 16 and ITR for the last 2 years
• Bank statements for 6 months
• Property documents
• Identity and address proof

For commercial property loans:

• Business registration documents
• Financial statements for the last 3 years
• GST returns for 24 months
• Existing property rental agreements
• Project approvals and clearances
• Chartered Accountant certificate

The bottom line truth

After 12 years in Indian commercial banking, I’ve seen this confusion cost investors everything from small opportunities to crore-rupee deals. The difference between “home loans” and “commercial property loans” isn’t just terminology – it’s the difference between getting your deal funded at competitive rates or watching it fall apart due to the wrong approach.

Smart Indian investors learn this distinction early. They understand when to use home loan benefits and when to step up to commercial products. They also factor in state regulations, tax implications, and long-term investment strategy.

Your real estate investment success in India depends on understanding which banking product fits your needs. Make sure you’re walking into the right department.

Disclaimer: Loan terms, rates, and requirements vary significantly by lender, borrower profile, property location, and current RBI guidelines. This article provides general guidance based on Indian banking practices as of September 2024. Interest rates mentioned are indicative and subject to change. Always consult with qualified banking professionals, chartered accountants, and legal advisors for advice specific to your situation and state regulations.

Sources:

• Reserve Bank of India Annual Report on Housing Finance, FY 2023-24
• National Housing Bank Statistical Returns, Q2 2024
• Indian Banks’ Association Commercial Lending Guidelines, Updated August 2024
• Banking Codes and Standards Board of India Annual Report, 2024
• ASSOCHAM Real Estate Investment Survey, 2024
• Business Standard Banking Section Archives, July-August 2024