Many people don’t perceive the difference between buying a new home and buying a piece of land. Both purchases are commonly referred to as “buying property.” However, there are differences to consider when looking for financing. Land loans are available for purchasing a plot of land for the purpose of building a house or investing, whereas home loan is accessible for properties that will be built in the future, are now under development, or are ready to move into. However, the two types of loans have some similarities.
Home Loan vs Land Loan
Purpose
A home loan helps you buy an under-construction or resold property. And a land loan helps you buy a plot of land on which you want to build a house. A plot cannot be purchased with a housing loan. A land loan cannot be used to purchase an unfinished or ready-to-move-in property.
Eligibility
In most cases, the home loan eligibility and eligibility conditions for land loans are the same. Banks in India provide both salaried and non-salaried candidates with land or home loans based on their age, income, repayment capacity, and credit score.
Before granting these loans, banks employ the same documentation and appraisal processes. For both products, the equivalent monthly installment (EMI) payment options are identical.
Tenure
Home loans, in contrast to land loans, have a significantly longer period. The maximum period for a home loan is 30 years. Here, the maximum term for a land loan is 15 years. In addition, after receiving approval for a plot loan, the borrower must complete the purchase within two years of receiving the loan.
Loan amount
While banks are ready to give up to 90% of the value of a home as a home loan, they normally only provide 60-70 percent of the value of a plot as a land loan. The buyer must provide for the remaining funds from his own resources.
Interest rate
Plot loans offer higher interest rates when compared to home loans. Home loans are currently available at a rate of around 7.50 percent per year. Plot loans are accessible at rates of between 8% and 10% per year. Plot loans are riskier than home loans because banks have collateral that they can sell quickly and recover losses if necessary.
Tax benefits
If you take out a home loan in India, you can deduct both the principal and interest payments from your taxes. Land loans, on the other hand, are not eligible for any tax benefits. Tax deductions are available if you build a home on the plot of land, but only for the loan amount received against the building. These advantages are only available after the construction project is completed.
Location of the property
While a home loan can be obtained for a property located outside of the municipal area, a land located in a village or industrial area is unlikely to qualify for a land loan. It should be within the corporation’s or municipality’s boundaries.
Loan-to-value ratio
LTV/LCRratio refers to the amount of money you can borrow based on the property’s worth or cost. The LTV/LCR ratio for home loans is typically 75-90 percent. (i.e., depending on the loan size, the borrower can typically secure a loan for 75-90 percent of the property’s value/cost). Depending on the loan amount, the maximum LTV for a land loan is restricted to 75-80 percent of the property value. So, whether you’re thinking about buying a piece of land for personal or investment purposes, you’ll need to put down a minimum of 20% of the purchase price.
Conclusion
If you’re looking for a ready-to-move-in residential unit or one that will be built to your specifications later, knowing the purpose and characteristics of both a home loan and a plot loan can help you decide which one is most suited to your needs.
