Purchasing a new house or a plot of land might not appear to be different to many of you as both purchases would be referred to as buying a property in common parlance, right? Well, if you ask us, then there's a lot of difference between the two that must be given due consideration while looking for a loan.
Whether you are a first-time home buyer or an experienced one, a home loan is the most critical thing you should know about before making a purchase decision. Yet, at the same time, many people prefer to buy an already constructed apartment or home. In contrast, many others opt for buying a residential plot of land, either to build a house or for investment purposes. And this is where you are stuck between applying for Home Loan or Land Loan.
So, in this guide, we will let you know everything about Home Loan and Land Loan, along with the similarities and differences between the two, so that you can make the best decision while applying for any one of them.
Also Read: Renting vs Buying A House
What is Home Loan?
To be short and crisp, a Home Loan is a secured loan obtained to purchase a house. This means that a housing loan helps borrowers buy under-construction or resale property. In order to be eligible for Home Loan, the borrower must buy a residential freehold property. To know more about Home Loan, look at its features in the next section of this article.
Features of Home Loan
The basic features of Home Loan that you must remember while applying for the same are as follows:
1. You can get a Home Loan to purchase a property at any location of your choice.
2. Under Home Loan, tax deduction can be availed.
3. The tenure of a Home Loan can go up to 30 years.
4. The Loan to Value ratio, i.e., LTV ratio, is up to 90% of the cost of the property, which entirely depends on the lender.
5. Depending on the lender, you can avail a Home Loan to buy either a bungalow, apartment, or row house from approved builders.
6. In the case of Joint Home Loans, if both the wife and husband have separate income sources, both can claim an income tax deduction on the loan separately for both the interest and principal component of the loan.
Also Read: Top 10 Faqs On Home Loans In India
What is a Land Loan?
A land Loan, also known as a Plot Loan, is a loan taken to buy a land parcel. This land parcel is the one upon which you intend to build a house as per your requirements. You cannot apply for a Home loan to purchase a plot of land. In the case of a Land Loan, the banks would provide borrowers a loan to buy non-agricultural plots.
Such plots can be plots on resale in a development authority project, plots in a housing society, or plots within the city limits or outside city limits. Regardless of the location of the land, it must be approved by the authority in charge for residential development purposes. If you wish to know more about Land Loans, have a look at its features below.
Features of Land Loan
The basic features of a Land Loan that you must keep in mind while applying for the same are as follows:
1. The plot of land for which you are taking a loan must be located within the limits of the corporation or municipality.
2. The land must not be located in an industrial or village area.
3. The Land Loan or Plot Loan cannot be used to buy agricultural land.
4. Tax deduction on such loans is only eligible for a loan taken for construction of the property on the land and can only be claimed after the completion of the construction.
5. The tenure of the Land Loan can go up to 15 years.
6. Depending on the lender, you can avail a Land Loan to purchase a plot of land through direct allotment or purchase a resale plot.
7. The Loan to Value ratio, i.e., the LTV ratio that you will get, is up to 80%. This means that up to 70% of the property cost will be offered as a loan.
Also Read: Plots In India
Similarities in Home Loan and Land Loan
Talking about the similarities between Home Loan and Land Loan, both these loans have the same eligibility criteria, application process, and interest rates. But one thing to note here is that this can also depend on the Non-Banking Financial Company (NBFC) or the bank you are applying from. In addition to this, whether you are applying for Home Loan or Land Loan, your credit score plays a crucial role in the application process.
Apart from this, regardless of whether you apply for a Home Loan or Land Loan, the due diligence process undertaken by the lenders to process both these loans is usually the same. Moreover, the EMI options provided by lenders and rules for co-applicants are also the same for both Home Loan and Land Loan.
As you have got to know the similarities between Home Loan and Land Loan, let's now understand how these loans are different from each other.
Home Loan Vs Land Loan- Differences
Based on multiple factors, we have differentiated Home Loan and Land Loan below:
1. Tenure of the loan
While the tenure of the Home Loans can go up to 30 years, the tenure for the Land Loans is kept between 15-20 years. However, it's important to note that some banks might insist on an even lesser tenure. Furthermore, after taking a Land Loan, the borrower must purchase within 2 years of getting the loan approval.
2. Loan to Value (LTV) ratio
LTV ratio for Home Loans is at around 75% to 90%. On the other hand, in the case of a Land Loan, the maximum LTV ratio is 75% to 80%. This means that if you're willing to buy a plot of land as an investment or for personal use, you would need to make a down payment of a minimum of 20% of the plot value.
3. Location of the property and purpose
Home loans can be availed for ready properties, self-constructed properties, or properties under construction. In contrast, the Land Loans can be availed for the purchase of a plot of land, provided that the land will be utilised only for residential purposes.
4. Tax benefits
Unlike Home Loans, where the borrowers enjoy multiple tax benefits on the interest and principal repayment, no tax deductions are allowed on Land Loans or plot purchases.
5. Interest Rate
Last but not the least, the final factor of differentiation between the Home Loan and Land Loan is Interest Rate. The interest rates on Land Loans are higher in comparison to Home Loans. Home Loans are available at around 7.50% per annum, whereas Land Loan is between 8% to 10% per annum. Land loans are riskier and hence priced high.
Also Read: EMI Calculator
To conclude, understanding the meaning, features, and purpose of both a Home Loan and a Land Loan can help you decide which one would be best to go for. So, before opting for the one, make sure to understand your requirements and note whether the property you are availing loan for is a ready-to-move residential unit or one that will be constructed later as per your design and needs.