Loan Against Residential vs Commercial Property: Key Differences Investors Must Know

We’ve all heard the pitch: “Unlock the value of your real estate without selling it.” Sounds neat, right?

But once you get to the fine print of a loan against property, suddenly it’s not that simple. Terms shift depending on whether you’re pledging your swanky Bandra apartment or your income-generating office space in Gurugram.
And here’s the thing, those differences can cost you lakhs over the loan tenure.
So, let’s decode it. Residential vs Commercial. Which asset makes for a better leverage story? And more importantly, when does it make sense to play one over the other?
Welcome to your DealPlexus deep-dive.

First Things First: What Is a Loan Against Property?

A loan against property (LAP) is a secured loan where you pledge an owned real estate asset, residential or commercial, to raise capital.
Banks and NBFCs love these products because there's an underlying asset, making it less risky than personal loans. You can use the funds for anything, business expansion, working capital, education abroad, refinancing, or even a personal liquidity crunch (hello, tax deadlines).
But here's the catch: the asset class you pledge, residential or commercial, heavily influences the terms you get.

Let’s compare.

The Face-Off: Residential vs Commercial Property Loans

Here’s your breakdown across five key fronts:

Translation?

If you're pledging a flat in Pune, expect more leniency. But if it's a showroom or co-working unit, you’ll need stronger documentation, higher DSCR (Debt Service Coverage Ratio), and a sharper credit profile.

Why is there such Disparity between the Both Properties?

It comes down to two things: risk and resale.

• Residential properties have a broader buyer base, more stable valuation history, and less legal encumbrance. For lenders, that’s comfort.
• Commercial properties, especially strata-sold units, can be riskier. Market demand fluctuates with business cycles, lease terms vary, and defaults have historically been higher in this segment.

Also, RBI guidelines require stricter norms for non-housing loans, especially when assets are income-generating or leased. That’s why LAPs on commercial properties come with a premium.

Investor Insight: Which Property Suits Which Purpose?

Let’s make this actionable.

Use Residential Property When:

• You’re a salaried individual or professional needing funds for personal reasons (education, medical, family capital needs).
• You need faster disbursal and lower interest rates.
• The residential asset is self-occupied or unused (e.g. inherited property).

Use Commercial Property When:

• You’re a business owner looking for working capital without diluting equity.
• The commercial asset is rented out and generates stable monthly income.
• You're comfortable with slightly higher interest for a higher ticket size.

Pro tip: Lenders may factor in rental income from the commercial asset to boost your loan eligibility, especially if there’s a long-term lease with a corporate tenant.

A Quick Word on Loans on Property Taxation

This often gets ignored in term sheets, but your loan on property has tax nuances:

• Interest paid on LAP is not deductible under Section 24(b), unlike home loans, unless the funds are used for business. In that case, interest may be claimed as a business expense.
• Principal repayment isn’t eligible for any tax benefit under 80C.
• Be mindful: If you use LAP for investing in equities, crypto, or buying a second property, you're staring at zero tax breaks and potentially high opportunity costs.

Hypothetical Instance: Two People, Two Outcomes

1. Radhika, a wellness brand founder, took a ₹1.5 crore loan against her unused South Delhi flat. She used it to fund a new product line and supply chain expansion. Thanks to residential classification, she got 9.15% interest, 70% LTV, and disbursal in 12 days.
2. Manish, a commercial property investor in Indore, pledged his leased warehouse for ₹2 crore to refinance an expensive mezzanine loan. His rate was 11.25%, LTV capped at 55%, and the lender insisted on tenant financials.

Both got capital. But the structure, pricing, and documentation varied, shaped by the nature of the property.

Myths to Bust Before You Sign That LAP Agreement

• Myth: “Residential property is always better for a loan.”
• Fact: It depends on the use-case, asset condition, and borrower type.
• Myth: “Loan on property doesn’t affect CIBIL much.”
• Fact: A LAP is a secured loan, but defaults hurt credit scores just like personal loans.
• Myth: “You can claim tax benefits like home loans.”
• Fact: Not unless it's tied to a business purpose. Keep that CA on speed dial.

Final Take: Leverage With Logic, Not Emotion

A loan against property is a powerful financing tool. But like all leverage, it rewards discipline and punishes carelessness.
Pledging your home for business growth? Great, just make sure your cash flows back into it. Using your commercial asset for working capital? Fine, but read that fine print thrice.
And always compare. Lenders in India, from big banks to niche NBFCs, price LAPs differently depending on location, occupancy, borrower profile, and even the floor of the building.

Next Step:

Thinking of unlocking liquidity from your property? DealPlexus handles the entire process for you, identifying the right solution, structuring the deal, and securing capital that fits your asset, risk profile, and business goals.
Don’t just borrow. Strategise.