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Land Loan Vs. Home Loan - Which One is Better?
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Banks provide loans for land purchase when funding is required to buy a plot or parcel of land, usually for residential purposes in urban areas. While the loan amount may vary, depending on the bank's policy and the borrower's eligibility, some banks also extend this financing option for land purchases in rural areas.
Land investment can be a valuable investment with a high potential for appreciation, although obtaining a land loan is more stringent than a home loan. It is possible to get a loan to purchase land by getting a home loan on a plot, submitting building plans, making a larger down payment, having a good credit score, understanding your debt-to-income ratio, and opting for equity loans.
Under Section 24 of the Income Tax Act, after the completion of construction and moving into your newly built house, you can receive a plot loan tax benefit on the interest paid towards your plot loan. If you convert your plot loan into a regular home loan that allows for this deduction, you can claim an annual deduction of up to Rs. 200,000 on the interest component of the loan. To convert the land loan into a home loan, you must provide your lender with the completion and occupation certificates.
Regarding land loan vs home loan, home loans can be used for ready properties, under-construction properties, or self-construction. Land loans, however, are only given to purchase residential land. Loan-to-Value (LTV) or Loan-to-Cost (LCR) ratio for home loans is around 75-90%, while for land loans, it is capped at 75-80%.
Home loans can be taken for 30 years, whereas a bank loan for land purchase is for 15 years. Tax benefits are available for home loans on both principal repayment and interest payment but not for land loans unless a house is constructed on the plot. Whether considering a plot loan vs home loan, both options offer their unique benefits and considerations.
Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.
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Buying a house is among the top priorities for many individuals. While a home loan is a popular financing option for purchasing a property, many aren’t yet aware of the nuances of a land loan. Most individuals use the term ‘home loan’ and ‘land loan’ interchangeably, but the fact is that both these loans serve different purposes. To help clear your doubts, we are going to shed some light on the major differences between a home loan and a land loan. This, in turn, will give you a better idea as to which type of loan you should avail depending upon the requirements.
Difference between Home Loan and Plot/Land Loan
1. Purpose Of The Loan
Home loan can be availed for buying a new or pre-owned house, under-construction house, or for building your own house. On the other hand, a land loan is availed for purchasing a plot of land, provided it lies in the municipal corporation limits and is any of the following:
With the help of leading banks and other financial institutions, you can easily avail a home loan or land loan through a hassle-free loan application process.
2. Loan to Value (LTV) Ratio
The Loan to Value (LTV) Ratio is the ratio of the loan amount that can be availed against the value of the property. In the case of a home loan, the LTV ratio can range from 75-90% of the property’s value, whereas for a land loan, the maximum LTV is capped at 75-80% of the plot’s value depending on the loan amount. However, if you need more funds to take care of additional expenses such as home renovation, expansion, etc., you can opt for a top-up loan by contacting your lender. A top-up loan is a financing option that is offered over and above your existing loan amount.
3. Loan Tenure
Home loans come with a longer tenure as compared to land loans. The maximum tenure of a home loan is 20 years, whereas land loans are offered for a maximum tenure of 15 years.
4. Tax Benefits
Under Section 80C of the Income Tax Act, you can avail of a deduction of Rs 1.5 lakh on the principal amount repayment. Moreover, Under Section 24, a deduction up to Rs 2 lakh can be availed on the interest payable. It must be noted that land loans are not eligible for any tax benefits. However, if you construct a home on the purchased plot, you can avail of tax benefits for the amount used in the construction of the house.
5. Eligibility Criteria
Home loans have simpler eligibility criteria as compared to land loans. Any Indian resident who is between 21 and 65 years of age, salaried or self-employed, and satisfies the minimum income criteria can avail of a home loan without much hassle. It must be noted that the home loan eligibility criteria may slightly vary for different lending institutions. In the case of a land loan, lenders usually grant the loan amount only to those borrowers who are certain of constructing a home on the purchased plot within the specified time. Moreover, for Non-Resident Indians (NRIs), availing of a land loan is even more difficult due to various government regulations.
6. Interest Rate
Lenders consider land loans to be riskier as it can be difficult to determine the accurate worth of the plot. Consequently, interest rates charged on land loans are slightly higher as compared to home loans. At present, it is possible to avail of home loans at around 7.50% per annum, whereas land loans can cost anywhere between 8% and 10% per annum.
7. Documentation
The documents required to avail of a land loan and home loan are the same. Some of the basic documents required are mentioned below:
To sum it up, a home loan is a better option if you wish to purchase a flat or under-construction property, whereas, if you wish to build your own house by purchasing a plot, you must go ahead with a land loan. Irrespective of which type of loan you settle for, ensure to read the terms and conditions carefully before signing the loan agreement.
Features of the Land Loan & Plot Loan
When considering a plot loan, it's important to keep in mind the following features and requirements:
Similarities In Plot Loan & Home Loan
A Home and plot loan undergoes a similar due diligence process during the application stage then you can imagine, regardless of which type of loan is being applied for. In addition, lenders often provide comparable EMI (equated monthly instalment) options and co-applicant regulations for both types of land financing.
The co-applicant can be a spouse, family member, or anyone who is willing to share the loan liability. Having a co-applicant with a good credit score and stable income can improve the chances of loan approval and may also result in a lower interest rate.
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