Home loans for buying a new home or owning a plot may appear like getting another house loan, but it’s not the same. While many people confuse land loan with a home loan, both these loans vary on certain fundamental differences. Let’s find out the differences between a home loan and a land loan.
Home Loan vs Land Loan
Both home and land loans are provided to you by banks and other financial institutions. Some banks also offer land loans for NRIs (Non-Residents Indians) if the land is being purchased only for constructing a house.
A home loan is offered by a bank to buy an already constructed house, under-construction house or a house that has been approved for construction shortly. Land loans, on the other hand, are acquired when the land you want to purchase is a residential plot.
While the home loan is offered with all approved properties despite its location or size, the plot loan has some regulations. These regulations are:
- The land must be used for only the residential purpose
- It must be a non-commercial or a non-agricultural property
- The land must be within the municipal/corporation limits
- The must not be within a village or an industrial area
Lower LTV for Land Loans
Loan to Value (LTV) is a quantum of loan that can be availed against a property. You can avail 80-85% home loan in most cases. But for a land loan, the maximum LTV is around 70% of the plot value. So, if you are considering buying a plot, you will have to spend a minimum of 30% funds yourself.
In case a property is located in a town or city, the maximum Loan to Value ratio for a land loan is lower at about 50% to 60% of the plot’s total cost.
The home loan interest rate is cheaper than land loans. There may be some minor differences according to the borrower’s profile. Moreover, both loans are liable for an additional processing fee.
Compared to the loan for plot purchase, home loans have greater tenure. The tenure for a home loan goes up to 30 years, whereas maximum tenure for plot loan is 15 years. However, some NBFCs offer 20-year land loan tenure.
It is the biggest setback for people opting for a land loan, as you’re not valid for an income tax deduction for making payments for loan EMIs. However, if the construction activity has been started on the bought plot, then you are eligible for tax benefits for that particular part of the loan. The loan part that’s used for the construction of a house can be used for tax benefits like an income tax deduction. This tax deduction starts only from the year when the construction activity gets completed.
Contrary to land loan, the borrower can easily claim tax benefits on home loan interest payable — this way the home loan is considered more beneficial for borrowers who are seeking a new house.
Overall, home loans have less legal verification requirements than land loans. There is a stringent documents verification process for land loans. Therefore, you have to ensure that you take proper legal help when applying for a land loan. Always read the terms and conditions of the lender for loan eligibility before applying so that there are fewer chances of loan rejection.