Home equity loan
A loan against property, or LAP, where the borrower pledges their own home as collateral to raise funds for any purpose, capped by the property's value and the lender's advance rate.
In plain language
A home is often a household's single biggest asset. A home equity loan is a way to unlock some of that value without selling the home.
It is also called a loan against property, or LAP. The borrower uses their home, or other real estate they own, as collateral. Because the loan is secured, the lender can offer a lower rate than it would for an unsecured loan of the same size.
What the borrower actually receives depends on two things: the market value of the property, and how much of that value the lender is willing to advance against it.
How it works
A home equity loan is secured against the borrower's own asset — the home is already owned by the individual, and they are borrowing against its security, not buying a new property with the loan. This is what separates it from a regular home loan, which finances the purchase of the property itself.
The extent of the loan is decided by the property's value and the lending institution's advance rate against that value — a lender advancing 60% against a property, for instance, extends a loan capped well below the property's full worth, keeping a margin of safety for itself.
A worked example
Mr Sharma owns a flat valued at Rs 80,00,000, fully paid off with no existing loan against it. His bank offers a home equity loan at 60% of the property's value, giving him access to up to Rs 48,00,000.
He borrows the full Rs 48,00,000 over 15 years at 9.5% p.a., working out to an EMI of about Rs 50,123. He uses the funds to expand his business — a purpose that has nothing to do with the flat itself, which simply serves as the collateral securing the loan.
Why NISM asks about it
Chapter 4 (Debt Management and Loans), section 4.7.3 (Home equity loan), defines LAP right after fixed and floating rate loans and just before hire purchase. Expect a question identifying a loan against property from a scenario, or one on what determines the loan amount available under it.
Common exam traps
- The property is already owned by the borrower — a home equity loan does not finance a new purchase, unlike a conventional home loan.
- The loan amount is capped by the lender's advance rate against the property's value, not by the full market value itself.
- The funds from a home equity loan can be used for any purpose — there is no restriction tying the money to the mortgaged property itself.
Where this is taught
Free preparation for NISM Series X-ARelated terms
- EMIThe Equated Monthly Instalment — the fixed monthly payment on a loan that covers both interest and a portion of the principal, calculated so the loan is fully repaid by the end of its term.
- Fixed rate loanA loan whose interest rate stays the same for the entire tenure, fixed at the time of borrowing — useful for locking in a low rate, as against a floating rate loan whose rate resets with a benchmark.
- MortgageA loan secured by a charge on the property it funds: the borrower keeps the asset in his own name, and the lender can take it over and sell it if the loan is not repaid.
- Pre-construction interestInterest paid on a home loan for the period before the property was acquired or constructed, deductible from house property income in 5 equal instalments starting the year of acquisition or construction.
- Housing Finance CompanyA company whose primary business is lending for the purchase of property or real estate, regulated by the Reserve Bank of India after that role moved from the National Housing Bank.