Having a home or a property to their name is one of the many investment goals (and life aspirations) of individuals, especially of the middle class. While many prefer to buy a ready to move in or an under-construction home or an apartment, there are many who like to invest in a plot of land which they can use to build a home of their dreams in the future.
However, given the ever-increasing real estate market, it is almost impossible to buy a property without external financial assistance. This is where loans come into the picture.
When it comes to getting a loan for buying a property, banks and NBFCs provide two types of loans, namely, home loans and land loans. Continue reading to find the similarities and differences between these two popular loans, and make a smart choice on which is the better option for you.
Definitions: Home Loan & Plot Loan
- A home loan as the name suggests is the loan taken by an individual (or HUF) to buy a residential property that is already constructed or under construction or will be constructed shortly.
- A plot loan on the other hand is the loan taken for buying a plot of land that is in an area that is reserved for residential property construction. Like the property under a home loan, the property for a land loan or plot loan also has to be clearly marked as residential for legal purposes.
A Comparison of Home Loans & Plot Loans: Key Differences
The first and the foremost difference between a home loan and a land loan is the purpose of the loan and the location of the property. While there are many additional restrictions on a loan taken for the purchase of a plot/land, home loans do not have such restrictions. They are readily available for all residential properties in any location.
|Every lender has its own set of criteria to be met for being eligible for a home loan. The major difference between a home loan and a land loan is lenders provide a home loan to NRIs as well.
Common eligibility criteria include:
|Like home loans, land loans also come with more or less the same set of eligibility parameters. However, most lenders do not provide land loans to NRIs.
|Loan to value ratio
|The loan to value ratio in the case of home loans is up to 90% of the value of the property. This implies that up to 90% of the value of the property will be provided by the lender and the balance has to be furnished by the borrower as a down payment.
|The loan to value ratio in the case of land loans is slightly lower and restricted up to 70% to 75% of the property value depending on the lender. This means that up to 70%-75% of the value of the property will be provided by the lender and the balance has to be furnished by the borrower.
|Tenure of the loan
|Home loans are long term loans and the tenure of these loans can be up to 30 years in the case of most lenders.
|The tenure of land loans is relatively lower as compared to home loans. The maximum tenure of land loans in most cases is up to 15 years.
|Home loans provide multiple tax benefits in the form of,
|There are no tax benefits on repayment of the land loan (EMIs) under the Income Tax Act. Tax benefits are available only in the case of composite loans which are for buying the plot of land and constructing a residential property on it. The deduction is available only for the construction of a house on the land and only after the completion of the construction.
|Rate of interest
|Home loans interest rates are the lowest among the retail loan segment and are approximately between 6.65% to 12% depending on the lender.
|The rate of interest on land loans is slightly higher as compared to home loans (usually 0.5% to 1% higher)
Additional Rules for Land/Plot Loans
There are specific guidelines that have to be met while applying for a loan to buy a plot. These rules are to safeguard the interest of the lender. Lending for the purchase of land loans is limited to only specific types of plots that meet all the eligibility criteria set in this regard. The meaning of the words ‘reserved residential property’ with respect to loans for the purchase of land refers to the following conditions.
- The land has to be primarily a residential property
- The plot of land cannot be located within a village
- The plot of land cannot be located within an industrial area
- The plot of land to be bought has to be within the municipal limits or within a corporation
- Another important condition is that such property cannot be a commercial or agricultural property
Borrowers should keep in mind the key differences between home loans and land loans to make a sound decision. From the differences mentioned above, it is clear that home loans provide more benefits to the borrower as compared to land loans. It is essential to first review the type of property needed by the borrower along with factors like repayment capacity, to choose the right loan.
In both cases, the application process and other relevant parameters like documentation and eligibility remain more or less the same including credit score requirements. It is essential to maintain a healthy credit score to get a loan at a better interest rate. Potential borrowers can check their credit score for free on CreditMantri before making a loan application to ensure there are no hassles in the loan application process.