Listed below are some of the notable features and benefits of land loans.
Location & type of property:
While home loans are available for all kinds or types or properties, a land loan may only be availed for the purchase of a residential plot. Another limitation in availing a plot loan is that the land in question must be located within the limits of the respective municipality or corporation. A plot loan is usually taken for the purchase of land with the idea of constructing a house.
Loan to value ratio (LTV):
Loan to value or LTV basically implies to the amount of loan you can get against a property. While the LTV ratio for home loans may be anywhere between 80% to 85%, for plot loans it is significantly lower and could be capped at a maximum of 70% of the land value. So, if you are considering taking a plot loan to purchase land and construct a house thereupon, expect to bear about 30% of the total cost of the land.
Tax benefits:
Contrary to popular belief, a land loan will not fetch you any tax benefits. You may however, avail tax benefits on a land loan, only if you plan to construct a house on the plot in the near future. In this case, the tax deduction will only be applicable on the construction amount of the loan and after the completion of the construction.
Tenure:
Compared to home loans, which usually carry longer tenure, a land loan is accompanied by a relatively shorter tenure. While the tenure for home loans may stretch up to a period of 30 years, the maximum available tenure for a land loan may stretch from 15 - 20 years.
Loan amount limit:
Plot loans offered by banks are often accompanied by a fixed upper limit. You may take the loan only up to a certain limit, as specified under the policy. Like other loans, different banks may carry different upper limits when it comes to land loans, so you must find out which suits you best based on your financial requirements..
Clauses included:
If you wish to opt for a land loan, do keep in mind, there are certain pre-requisites which you will have to observe. The most prominent clause of any land loan is that it requires the borrower to begin construction on the acquired plot of land within a specified period of time.
Prepayment charges:
Since a plot loan is not the same as a home loan, it is very likely that the loan provider may charge a prepayment penalty. In order to be sure, do enquire with your loan provider about the same beforehand.
Interest rates:
Like other types of loans, the interest rates on plot loans can also be floating or fixed, depending on the bank and the prevailing market conditions. However, interest rates on plot loans are relatively higher as compared to other types of loans like home loans or auto loans.
EMIs:
Home loans are usually characterized by shorter tenures and higher EMIs. This is for the reason that plot loans are sanctioned for a shorter duration as compared to most other types of loans. EMIs on plot loans are also dependent on a number of other factors like the repayment capacity of the borrower, borrower’s age, etc.
Down payment:
When it comes to land loans, down payments for them are usually higher. The loan to value ratio for land loans prevails around 70%, which means that the borrower would have to shell out around 30% of the plot value themselves.
Plot loan eligibility criteria
Land loans may be obtained by individuals who are residents of India and aged above 21 years. While NRIs also constitute a prominent part of property buyers segment in India, there are not many Banks/NBFCs which extend plot loans to this category of individuals. Also, interest rates on plot loans might also be slightly higher for NRIs.
How is land loan different from home loan?
Although the terms, rates and processes related to land loans are similar to that of a home loan, there are some intrinsic differences between the two.
Indian investors are traditionally inclined towards buying land either purely as an investment or for building a house. So, if you are looking to buy a plot, you may not be eligible for a home loan, but for a land loan. Home loans are available only for the property already constructed, under construction or likely to undergo construction soon. For funding the purchase of a vacant plot, you will have to go for a land loan instead. Although the terms, rates and processes related to land loans are similar to that of a home loan, there are some intrinsic differences between the two as outlined below:
Property Location and Type:
Unlike home loans which are available on all properties irrespective of their location or type, you may get a land loan only for a residential plot. Also, “the property should be located within municipal or corporation limits. Consequently, you cannot obtain funding for buying an agricultural land, or for buying a piece of land in a village. But you can go for a home loan, for constructing your house in that piece of land, after the purchase,”
Lower LTV:
Loan To Value (or LTV) is the quantum of loan you can get against a property. While you can avail up to 80-85% funding in a home loan (90% in some cases), for a land loan, the maximum LTV is stipulated at 70% of the plot value at best. This effectively means that if you are considering buying a plot for either personal use or as an investment, you would have to shell out a minimum of 30% of the funds from your own pocket.
No Tax Benefits:
Unlike a housing loan, which is eligible for tax deduction for payment of both interest as well as the principal amount, land loans do not offer any such benefit. “You can avail tax deductions only if you are constructing a house in the plot. The deduction in that case is applicable only for the loan amount taken against construction, and only after completion of the construction activity,”.
Land Loan and NRIs:
Non Resident Indians are a potential segment of property buyers in India. If you are a Non Resident Indian and seeking to purchase a plot through a land loan, an extensive search is required. Majority of Banks/NBFCs do not offer land loans to Non Resident Indians. Even if offered, they may come at a higher interest rate.
Lower Tenure:
The loan tenure for land loans is lower compared to housing loans. The maximum loan tenure available for land loans is 15 years while for a home loan one can go up to 30 years’ tenure. However, some Banks/NBFCs offers 20-year tenure for land loans.
Cap on Maximum Loan Amount:
Most Banks/NBFCs keep a maximum upper limit on land loans. “Indian Bank and Punjab National Bank, for example, stipulate maximum loan availability of Rs 1 crore and Rs 50 lakhs respectively for purchase of land. Check with your bank on the upper limit on loan amount before you shortlist your lender, as this can considerably affect your finances if you are looking for a big ticket loan for investing in real estate,”.
Loans for Land Purchase and House Construction:
Besides these, if you are opting for a refinance option for your land purchase with a condition that you will start the house construction soon, there are some prerequisites. Most Banks/NBFCs have a precondition to begin construction on the acquired plot of land within a stipulated period of time. For instance, “State Bank of India offers land loans only when the owner promises construction of the house within 2 years from the date of allotment of SBI Realty Loan. For ICICI Bank, the construction must be completed within two years from the date of availing first disbursement of the loan”.
A land loan is often treated as part of the home loan options provided by Banks/NBFCs and is treated in the same way as that of a home loan. The above-mentioned conditions are the only exceptions in the treatment of a land loan. The process and requirements such as the Banks/NBFCs due diligence process, EMI options, documentation, need for co-applicants, rate of interest, etc are the same for both home loans as well as land loans.
