While home loan can be taken even for a property outside the municipal area, however, a land which is in a village or industrial area does not usually qualify for the land loan.
When it comes to getting loan to buy a property, a land loan and a home loan are treated differently by lenders. If you are someone who is planning on purchasing land to build a property, you should know how a land loan differs from a home loan. Read on to find out the key differences between a land loan and a home loan.
Who is eligible?
While NRIs can easily get a home loan, however, when it comes to land loan, only resident Indians can get the loan as this loan is not offered to NRIs.
What type of property is eligible?
Home loan lending rules are quite flexible when it comes to the type of properties that will qualify for a loan. However, when it comes to land the lending is very limited and is restricted to only specific types of land.
“Lenders usually fund lands allotted by development authorities. These days multiple builders are coming up with various projects where land allotments are done, such land can also be funded with the condition of being legally approved by the lender,” says Rishi Mehra, CEO, Wishfin.com.
The status of land use becomes critical as lenders offer finance mostly for residential land. So, you may not get a loan for buying an agricultural or commercial land. Though there are some special loans which can be used for buying agricultural land, however, these loans are not readily available to all borrowers as they are targeted to specific set of borrowers like marginal farmers or landless labourers.
Location of the property
While home loan can be taken even for a property outside the municipal area, however, a land which is in a village or industrial area does not usually qualify for the land loan. It should be situated within the corporation or municipal limits.
The said land should have clear demarcation too. “The land in question should be identifiable during the visit hence a boundary wall is mandatorily required for it,” adds Mehra.
What is the maximum loan amount one can get?
The loan to value (LTV) on land loan differs from that of a home loan. For a home loan, many borrowers get up to 90% of the value of the property as the loan amount, however, the loan amount is lower for land loan. “In case of land loan, borrowers can avail 70% – 75% of the property cost. This is applicable for instances where only land purchase is funded. The lenders tend to fund higher if a customer avails a land purchase and construction loan,” says Mehra.
While 75% is the upper limit, in practice the lenders are more conservative both in terms of valuation of the land and the amount of loan they will lend. So, it is better to expect a lesser amount of loan while panning to buy a land with a loan and arrange for at least 30% or higher amount for downpayment.
|Difference between Home Loan and Land Loan|
|Loan type||Home Loan||Land Loan|
|Who is eligible||Resident Indians and NRIs||Only Resident Indians|
|Type of property||Residential||Residential|
|Location||Anywhere||Municipal or Corporation Area|
|Maximum Loan||90% of the value of property||75% of the value of the land|
|Interest rate||Lowest among retail loans||0.5% to 1% above home loan|
|Tenure||Up to 30 years||Up to 15 years|
|Tax benefit||On interest and principal repayment||No|
What is the interest rate?
The interest rates on home loans are one of the lowest among all loans. However, the same is not the case with the land loan as it comes at a higher rate.
“Rate of interest on land loan is 0.50% – 1% higher than that of a home loan. Presently rate of interest for land loans begins at 7.05% (HDFC Ltd) for up to Rs 30 lakh loan amount. This varies with every lender,” say Mehra. The rate of interest on a home loan from HDFC and SBI starts at 6.75% for women borrowers.
What is the loan tenure?
Home loans offer one of the highest tenures for loan repayment which can go up to 30 years. However, the tenure of the land loan is not that long. “Land loans are available for lesser tenure in comparison to home loans. Maximum possible tenure for land loans is 15years. Lenders like SBI offer 10 years tenure in case of land loan,” says Mehra.
No tax benefit on land loan
While the repayment of home loan principal for a self-occupied property and interest payment qualify for income tax deduction under section 80C and section 24b respectively. There is no such taxation benefit available on a land loan.
Construction linked composite loan
Composite loan is a loan gives by lenders for the purpose of purchasing a plot or land and constructing a house on it within a given a timeline. You can get around 70-75% of the value of the land as loan for this purpose.
“One of the most important clauses in a composite loan, which customers are not aware about, is this facility comes with a time limit for construction. Borrowers have to begin construction in 3 to 5 years, this time period varies from lender to lender,” says Mehra.
The part of the loan which is meant for construction is disbursed only after the borrower meets specific conditions. “While applying, they are required to provide a cost estimate for construction and an Approved Plan from the local authority along with a chain of documents for the land. Construction loan is disbursed only once the foundation work is completed on the land”
Till the time construction begins the borrower has to pay a higher interest rate like land loan. “The composite loan attracts a rate of interest same as a home loan. However, the borrower is charged a slightly higher rate of interest, like land loan, till they do not begin the construction,” adds Mehra.