Difference Between a Land Loan and Home Loan
Are you looking to buy your dream home or acquire a piece of land in a prime location in the city for investment purposes? One of the quickest ways to put your ideas in motion is by getting a loan. This article discusses land and home loans to help you make an informed choice.
If you want to buy a property, you will likely cross paths with these two types of loans. But how to differentiate one from the other? Let us explore and understand.
Home Loan Vs Land Loan
Home and land loans typically have the same terms and conditions and the application process. However, a few fundamental differences exist between the two.
Definition
You can avail of a home loan for ready-to-move properties, properties under construction, to be self-constructed.
Land loans, also known as plot loans, are offered for purchasing a plot of land. However, the plot must specifically be for residential use.
Eligibility Criteria
Both resident and Non-Resident Indians can avail of home loans. In contrast, a land loan is strictly offered to Indian citizens only.
Plot and home loans are offered to salaried and self-employed individuals based on the following criteria:
- Age
- Source of income
- Credit score
- Repayment capacity
Property Location
You can take a home loan for property outside the municipal area. However, any land inside a village or industrial area does not qualify for a land loan. In this case, the plot of land must reside within the municipal limits.
In addition, the land in question must be demarcated.
Tenure
The tenure for home loans is exceptionally high, extending up to 30 years. In contrast, the tenure for land loans is 15 years. However, this is the maximum tenure. Lenders like the State Bank of India provide a tenure of 10 years for land loans.
Interest Rate
Interest rates on home loans tend to be the lowest in the market. On the other hand, the interest rate on land loans is typically 0.5% to 1% higher than on home loans.
Tax Benefits
Principal repayment and interest payment for home loans qualify for tax deduction under Section 80C and Section 24B of the Income Tax Act.
Contrarily, land loans do not come with tax benefits.
Loan to Value
The loan to value (LTV) is the percentage of property value a lender can lend to the borrower. The LTV of land loans differs from that of home loans.
The LTV can be as high as 90% for home loans. However, in the case of a land loan, a borrower can get only up to 75% of the property value. This limit applies only to loans meant specifically for land purchase. The lenders may fund higher if the borrower avails of a land purchase and construction loan.
Remember that 75% is merely the upper limit. Most lenders are conservative in terms of the loan amount and valuation of the property. So, expecting approval on a lesser amount would be wiser.
Summary
| Category | Home Loan | Land Loan |
| Eligibility Criteria | Both resident Indians and NRIs can apply for the loan. | Only Indian citizens can apply. |
| Objective | The loan is meant for the purchase or construction of residential properties | The loan is given for buying a plot of land. |
| Tenure of the Loan | Maximum tenure is 30 years. | Maximum tenure15 years. However, the upper limit may vary from one lender to another. |
| Benefits of the Taxes | The principal amount and interest are both tax-deductible under the Income Tax Act. | No tax benefits. |
| Location of the Property | No restrictions. | Plots in industrial or rural areas do not qualify for the loan. The land should strictly be located inside municipal limits. |
| Maximum Loan-to-Loan Value | Up to 90%. | Up to 75%. |
| Rate of Interest | 7.25 – 7.50% per year. | 8.0-10.0% per year. |
Composite Loans
Do you belong to the unique category of borrowers who want to purchase a plot and build a house on it? In that case, go for a composite loan. These loans are given by lenders to buy a plot and construct a house within a specified timeline.
Before applying for such loans, note that the time limit is crucial here. Typically, borrowers must begin construction within 3-5 years. However, the period varies from one lender to another. Moreover, the construction-specific part of the loan is disbursed only when you complete the foundation work.
A composite loan attracts the same interest rate as home loans. However, you may have to pay slightly higher interest till you do not begin construction.
Conclusion
The application and repayment procedures are the same for home loans and land loans despite their differences. Both have their specific benefits and purposes.
The article above has listed down crucial information to help you determine which one suits your needs. However, remember that your credit score is vital for both loans.
Do you want to start looking at various options for home loans and land loans? Want to check which lender offers the best interest rate? Visit Piramal Finance for 360-degree understanding.