Land Purchase Loans vs Home Loans - Know the DifferencePurchase & Refinance Mortgage LoansUpdated on Aug 7, 2018 View more like this | Visit India, UN | Contact Anamika Verma |
Loans for land purchase are clubbed under the Home Loan heading by lenders. However, there is a lot of difference between Home Loans, and Land Purchase Loans. Be aware of the pre-conditions and clauses related to Land Purchase Loans before you apply for one.
Home Loans Basics
All types of Home Loans: Home loan for purchase of a constructed home or under construction by a builder, Home Construction Loan for building a home on a plot owned by the borrower, Home Renovation Loans—all these are Home Loans with similar features.
These Home Loans are available at comparatively low interest rates, as the home itself is the collateral. The LTV ratio is around 70 to 80%. You are allowed to make partial payments, and you can even foreclose floating rate Home Loans without a penalty.
You also get a lot of tax benefits, on both the principal repayment and the interest component of loan repayment.
Land Loans
These loans are available to help you raise funds for purchasing a piece of land. Traditionally, Indians love investing in real estate. They either buy a plot for construction of a home, or as an investment for the future.
Before the proliferation of residential projects by real estate developers, most people bought a piece of land and later built a house on it according to their own design. Some people still like to go down this route. For them, loan for land purchase is a good option. Use land loan eligibility calculators online to find the amount you can get as loan, based on your financial standing.
However, there are strings attached to land loans.
Land Purchase Loans Criteria
For land loans, you have to follow certain rules to qualify for the loan.
Location of Plot
For a Home Loan, as long as it is an approved property, the house might be located anywhere. For land purchase loans, the piece of land must be within the corporation or municipal limits. It cannot be located in an industrial area, it cannot be located in a village.
Land Attributes
The plot should be:
- Non-Agricultural
- Not meant for commercial purposes
- Approved for residential construction
Other Differences Between Home Loans and Land Purchase Loans
Besides the conditions attached to the location of land and type of land, there are other differences between these two types of loans:
Loan to Value Ratio: For Home Loans you can generally get upto 70 to 85% of the actual value of the property as loan. For Land Purchase Loans you can only get 50 to 70% of the land’s assessed market value as loan. You have to be prepared to raise 30 to 50% of the amount required on your own, as the down payment.
Maximum Amount You Can Get as Loan: Many lenders set a cap on the amount they will lend as loan to buy land. Even if you have the financial resources that makes you qualify for a higher amount, the lender will not approved a higher loan amount.
Construction of House on the Land: Most lenders view a plot as an unproductive asset. Unlike a home, you cannot reside in it to save rent nor can you let it out on rent and earn an income on it. So, they set a condition that construction of a house should be started on the land within a stipulated period which can range from 2 to 5 years according to the lender. If you do not begin construction within this period, your interest rate may be hiked, or you might even be asked to foreclose the loan.
Higher Interest Rates and Lower Tenor: Land loan interest rates tend to be slightly higher than home loan interest rates. Also, loan tenors for land purchase loans are shorter. Home loans can have a maximum tenor of 20 or even 30 years. Land loans are given for a maximum of 15-year tenor, though some lenders offer a 20-year tenor.
Tax Benefits? None on Land Loan: Home loans allow for tax deductions under different sections. You can avail Home Loan tax benefits upto Rs. 1.5 Lakhs on the principal component of the repayments made in that year, under Section 80C of the Income Tax Act. You can also claim tax deduction for the interest amount repaid that year on the loan. You can claim upto a maximum of Rs. 2 lakhs on interest repayment if you reside in the house. If it has been rented out, there is no cap on the maximum amount of interest payment you can claim.
Land loans do not come with any such tax benefits.
Who can get Land Loans?
Resident Indians of the age of 21 and above can apply for loan to buy land. Check for low interest rates. Use land loan EMI calculator on financial marketplace websites to find good land purchase loan offers. Select loan offers that you find attractive and approach the lenders for more details.
A few banks and NBFCs provide loans to NRIs for land purchase, but the approval process could be more tedious and the land loan interest rates could also be much higher.
For land loan eligibility, a similar set of criteria as Home Loans apply. So, you should have a good income, low expenses, and a good credit rating.
Also Read: WHAT YOU NEED TO KNOW ABOUT LAND PURCHASE LOANS
Land loans are useful if you want to begin construction of a residence on the plot within 2 or 3 years. Otherwise, you may face problems. Land loans also do not provide all the benefits that you get with a home loan. While loans to buy land may be less attractive than Home Loans, they help you raise a part of the funds needed for buying a good piece of land. You can also avail a loan against land to raise funds for different purposes.
Home Loans Basics
All types of Home Loans: Home loan for purchase of a constructed home or under construction by a builder, Home Construction Loan for building a home on a plot owned by the borrower, Home Renovation Loans—all these are Home Loans with similar features.
These Home Loans are available at comparatively low interest rates, as the home itself is the collateral. The LTV ratio is around 70 to 80%. You are allowed to make partial payments, and you can even foreclose floating rate Home Loans without a penalty.
You also get a lot of tax benefits, on both the principal repayment and the interest component of loan repayment.
Land Loans
These loans are available to help you raise funds for purchasing a piece of land. Traditionally, Indians love investing in real estate. They either buy a plot for construction of a home, or as an investment for the future.
Before the proliferation of residential projects by real estate developers, most people bought a piece of land and later built a house on it according to their own design. Some people still like to go down this route. For them, loan for land purchase is a good option. Use land loan eligibility calculators online to find the amount you can get as loan, based on your financial standing.
However, there are strings attached to land loans.
Land Purchase Loans Criteria
For land loans, you have to follow certain rules to qualify for the loan.
Location of Plot
For a Home Loan, as long as it is an approved property, the house might be located anywhere. For land purchase loans, the piece of land must be within the corporation or municipal limits. It cannot be located in an industrial area, it cannot be located in a village.
Land Attributes
The plot should be:
- Non-Agricultural
- Not meant for commercial purposes
- Approved for residential construction
Other Differences Between Home Loans and Land Purchase Loans
Besides the conditions attached to the location of land and type of land, there are other differences between these two types of loans:
Loan to Value Ratio: For Home Loans you can generally get upto 70 to 85% of the actual value of the property as loan. For Land Purchase Loans you can only get 50 to 70% of the land’s assessed market value as loan. You have to be prepared to raise 30 to 50% of the amount required on your own, as the down payment.
Maximum Amount You Can Get as Loan: Many lenders set a cap on the amount they will lend as loan to buy land. Even if you have the financial resources that makes you qualify for a higher amount, the lender will not approved a higher loan amount.
Construction of House on the Land: Most lenders view a plot as an unproductive asset. Unlike a home, you cannot reside in it to save rent nor can you let it out on rent and earn an income on it. So, they set a condition that construction of a house should be started on the land within a stipulated period which can range from 2 to 5 years according to the lender. If you do not begin construction within this period, your interest rate may be hiked, or you might even be asked to foreclose the loan.
Higher Interest Rates and Lower Tenor: Land loan interest rates tend to be slightly higher than home loan interest rates. Also, loan tenors for land purchase loans are shorter. Home loans can have a maximum tenor of 20 or even 30 years. Land loans are given for a maximum of 15-year tenor, though some lenders offer a 20-year tenor.
Tax Benefits? None on Land Loan: Home loans allow for tax deductions under different sections. You can avail Home Loan tax benefits upto Rs. 1.5 Lakhs on the principal component of the repayments made in that year, under Section 80C of the Income Tax Act. You can also claim tax deduction for the interest amount repaid that year on the loan. You can claim upto a maximum of Rs. 2 lakhs on interest repayment if you reside in the house. If it has been rented out, there is no cap on the maximum amount of interest payment you can claim.
Land loans do not come with any such tax benefits.
Who can get Land Loans?
Resident Indians of the age of 21 and above can apply for loan to buy land. Check for low interest rates. Use land loan EMI calculator on financial marketplace websites to find good land purchase loan offers. Select loan offers that you find attractive and approach the lenders for more details.
A few banks and NBFCs provide loans to NRIs for land purchase, but the approval process could be more tedious and the land loan interest rates could also be much higher.
For land loan eligibility, a similar set of criteria as Home Loans apply. So, you should have a good income, low expenses, and a good credit rating.
Also Read: WHAT YOU NEED TO KNOW ABOUT LAND PURCHASE LOANS
Land loans are useful if you want to begin construction of a residence on the plot within 2 or 3 years. Otherwise, you may face problems. Land loans also do not provide all the benefits that you get with a home loan. While loans to buy land may be less attractive than Home Loans, they help you raise a part of the funds needed for buying a good piece of land. You can also avail a loan against land to raise funds for different purposes.
