Both home loan and land loan help you buy a property. While a home loan is availed to buy a property that is already constructed, is under construction, or will be constructed in the future, a land loan is availed to buy land. There are many similarities between a home loan and a land loan. However, if you look closely, there are substantial differences.
Features of home loans and land loans
|Features||Home Loans||Land Loans|
|Purpose of availing the loan||To buy a constructed, under-construction,or to-be-constructed property||To buy a land/ plot|
|Eligibility||Both Resident Indians and NRIs can apply||Both Resident Indians and NRIs can apply|
|Tax benefits||Tax deductions available for both repayment of interest and the principal amount||No tax deductions available (Applicable only for the construction year)|
|Tenure of the loan||The loan tenure can go up to 30 yearsdepending on the lender||The tenure of the loan can go up to 15 years depending on the lender|
|Loan-to-Value Ratio||Up to 80% (Can go up to 90% in certaincases)||Up to 50% to 70%|
|Foreclosure charges||Not applicable for floating rate home loans||Foreclosure charges can range from2% to 5%|
Differences between home loans and land loans
Location of the property: Location of the plot plays a crucial role when availing a land loan. While home loans are easily approved for properties in any location, there are certain requirements when it comes to plot loans. Many lenders offer land loans for residential plots which are within the municipal limits. There are a few banks that provide land loans only if the borrower guarantees to build a house later. For example, State Bank of India offers “SBI Realty Home Loan”. This loan can be availed to buy a plot. However, the borrower must guarantee that the construction of the house will take place within 5 years from the date the loan is sanctioned.
Loan-to-value: Loan-to-Value Ratio is the extent of the loan you will get against the value of the property. The LTV is high when it comes to home loans. You can get up to 80% of the value of the property as the loan amount. In certain cases, you can get 90% of the value of the property as a home loan. However, when it comes to land loans, the LTV ratio ranges from 50% to 70% of the value of the property. You should be prepared to pay the remaining amount to buy the land.
Tenure of the loan: Generally, the tenure of a land loan is lower than a home loan. The maximum tenure of the loan on home loans can go up to 30 years. However, when it comes to land loans, the maximum tenure of the loan can go up to 15 years.
Tax benefits: This is one of the crucial differences between a home loan and a land loan. In case of a home loan, tax deductions can be claimed on both interest and principal repayments up to a certain amount. However, land loans are not eligible for tax deductions. If you avail a land loan with a promise to start construction within a specific period, you will be eligible for tax deductions only after the construction is complete.
Apart from the aforementioned differences between home loans and land loans, the process for both the loans remains the same. The overall procedure such as the documentation process, EMI payment options, and interest rate calculation are very similar. If you are planning on applying for a home loan or a land loan, you can compare various loans on the official BankBazaar website. BankBazaar is a neutral third-party financial advisory website that helps customers find the right loan based on their eligibility and requirements.
Before you avail a land loan, consider the pros and cons. Avail a land loan only when it is financially beneficial for you in the longer run. If you are planning on constructing a house in the near future, check if there are better home loan deals that will benefit you.