Difference between home loan and land loan

[ecis2016.org] Even though several similarities and differences exist between the two financial products, a buyer must have a clear understanding about home loans and plot loans in order to ascertain which instrument would be suitable for his specific needs

A home loan is taken to purchase a house or for the construction of one. A land or plot loan is taken to buy a land parcel. There are several similarities and differences between the two financial products. Consequently, a buyer must have a clear understanding about each of them, in order to ascertain which instrument would be suitable for his specific needs.

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Home loan versus land loan/plot loan

Purpose

While a housing loan helps you to purchase an under-construction or resale property, a land loan helps you to buy a land parcel, upon which you intend to build a house. You cannot apply for a home loan to purchase a plot. Similarly, you cannot apply for a land loan, to purchase an under-construction or ready property.

Eligibility criteria

The eligibility criteria for both the products are usually the same. Banks in India offer land or home loans to salaried and non-salaried applicants based on their:

•         Age
•         Sources of income
•         Repayment capacity
•         Credit score

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Banks use the same documentation and appraisal processes, before they grant these loans. The equated monthly instalment (EMI) payment options are also similar for both the products.

In case of a home loan, the borrower must buy a residential freehold property to be eligible. In case of plot loans, banks would offer you a loan for the purchase of non-agricultural plots. These plots can be in a housing society, or plots on resale in a development authority project, or a land parcel plot within the city limits or plots outside the city limits. Irrespective of the location of the plot, it must be approved by a competent authority for residential development purposes.

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Tenure

While the tenure of home loans could go up to 30 years, for plots, the tenure is kept between 15 and 20 years. Some banks might insist on an even shorter tenure.

Also after taking a plot loan, the borrower must make the purchase within two years of getting the loan approval.

Loan amount

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While banks are open to lending 90% of the property value as home loans, they typically offer 60%-70% of the plot’s worth as land loan. The remaining money has to be arranged by the buyer from his own pocket.

Interest rate

The interest rates on plot loans are higher, compared to home loans. Home loans are currently available at around 7.50% per annum, while plot loans at present cost between 8% and 10% per annum. Plot loans are comparatively riskier and hence, priced higher than home loans, where banks have a collateral that they can easily sell and recover losses, if need be.

Tax benefits

Unlike home loans, where borrowers enjoy several tax benefits on the principal and interest repayment, no tax deductions are allowed on plot purchases.

In case a composite loan is taken to carry out the construction work, the borrower would become eligible to claim the tax benefits under various sections of the income tax law, including Section 24, Section 80C, Section 80EE and Section 80EEA. A composite loan is one which combines the land purchase with construction cost.

Do note here that the tax deduction on composite loans would be applicable only for the loan amount taken for construction and can be availed of only after the construction is over.

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