Loans for buying a house and owning a plot may just seem like getting another home loan, but it’s not. Land loan and home loan may seem similar on many parameters, but have some fundamental differences.
Let’s find out what the differences are and which one is suitable for you.
Home vs Land
Both land and home loans are offered by banks and Non-Banking Financial Companies (NBFC) to all Indian residents over the age of 21 years. Some banks also offer land loans to Non-Residents Indians (NRI) if the land is being bought to construct a house.
While a home loan is granted by a bank or an NBFC to purchase a house that is already constructed, under construction, or has been approved for construction in the recent future, for land loans one needs to make sure that the plot of land that you want to purchase is a residential plot.
Also, while home loans are available on all approved properties irrespective of their location or size, land loans have some regulations.
# The land needs to be used for residential purpose in future
# It should be a non-agricultural and non-commercial property
# Situated within municipal/corporation limits
# Not in an industrial area nor a village
Lower LTV for Land Loans
Loan To Value (or LTV) is the quantum of loan you can get against a property. One can avail up to 80-85% funding in a home loan (90% in some cases). But for a land loan, the maximum LTV is capped at 70% of the plot value at best. So, if you are considering buying a plot for either personal use or as an investment, you would have to shell out a minimum of 30% of the funds from your own pocket.
If the property is situated in smaller cities or towns, the maximum Loan To Value (LTV) ratio for land loans can be lower, at about 50%-60% of the total cost of the plot.
Interest on loan charged by lenders on home and loan are similar. However, home loan interest rates are usually a few basis points (100 basis points=1%) cheaper than land loans. There could be some minor differences as per the borrower’s profile. Also, both types of loans charge additional processing fee.
Home loans have a higher tenure in comparison to land loans. Usually, tenure for home loans can go up to 30 years, but the maximum tenure for a land loan is 15 years. Some NBFCs may offer 20-year tenure for land loans.
This is by far the biggest setback for those opting for a land loan as even though it is offered for construction of a house, you are not eligible for income tax deduction for payments made towards the repayment. However, if you start construction activity on the purchased plot, then you become eligible for tax benefits for that part of the loan. The part of the loan that is used for the construction of a house can be used for tax deduction. The deduction is applicable only from the year in which the construction activity is completed.
Contrary to this, one can claim deduction on the interest for and type of home loan.
Overall, legal verification of documents for land loans is much more stringent than home loans. So, make sure to get legal help when going in for a land loan.
(By Adhil Shetty. The writer is CEO at Bankbazaar.com)