Loans provided for land or residential property purchase may appear to be same for a lot of borrowers. However, these two funding options typically differ on specific fronts, with significant financial bearings. It is thus essential that borrowers gain a comprehensive understanding of the differences and make their financial decisions accordingly.
Even though there may be many similar parameters between a home loan and a loan for plot purchase, some particular fundamental distinctions set them apart. Take a look.
Characteristic differences between a housing loan and a loan for plot purchase
- Basic requirements for land and housing loan
Both home and land loan are offered by housing finance companies to all residents of India who are above the age of 21 years. A home loan is available for house construction on all the approved properties or for the purchase of property which has already been constructed or still under construction. However, to avail a loan for a plot of land, the purchase will necessarily have to be of a residential plot.
Specific stipulations have to be met when availing a loan for land. Those are –
- Plot to be purchase must be available for residential purpose.
- Its location has to be within a corporation or municipal limits.
- The plot must be non-commercial or non-agricultural property.
- It must not be in a village or industrial area.
These aspects need to be kept in mind when choosing between a land purchase loan and a home loan.
- Loan to value ratio differs for the two advances
Loan to Value or LTV is the percentage of the loan that a lender is ready to provide against a specific property’s current market value. In a home loan, funding can be availed up to an LTV of 80%-85% (in certain instances upto 90%). However, in the case of a land purchase loan, the maximum LTV is limited to 70% of the value of the plot.
Hence, borrowers will need to fund the rest 30% on their own when purchasing a land. If the plot is located in a small town or city, the maximum LTV further reduces to approximately 50%-60% of the total valuation of the plot of land.
- Rate of interest
The rate of interest charged on loan for land as well as on a housing loan is another essential point of consideration. The interest rate on housing loans is often marginally lower as compared to that for a land purchase loan. Nevertheless, given that the loan amount is often high in both cases, even a marginal difference between the two can result in sizable interest reduction with the right loan choice.
- Tax deduction benefits
Tax benefit available on the two loans is a significant point of difference between the two advances. The income tax deduction is not applicable for the repayments made towards a land loan.
However, if construction activity has already been started on the purchased plot before availing the loan, then the borrower becomes eligible to avail tax benefits. However, the benefits are applicable only for the home construction loan availed against such construction and can be availed only once the construction is complete. On the contrary, deduction on interest paid and principal repayment made can be claimed for all types of housing loans.
- Tenure flexibility
Land purchase loans come with a shorter tenure than home loans. The longest tenure of for the former can go up to 15 years, whereas, that for a home loan can continue between 20 and 30 years in some cases. Tenure flexibility should thus be considered before applying for a land purchase loan or a housing loan as per the borrower’s repayment capacity.
With these considerations in mind, it is easy to conclude that housing loans are more flexible and come with enhanced benefits than land purchase loans. Making the right decision can thus help borrowers save significantly while allowing them to manage their finances efficiently. The availability of online application facility has only made these financing options more accessible.
Leading financial institutions also extend pre-approved offers to customers, which make the process of availing loan much simpler and less time-consuming. Mostly, such offers include various financial products, including home loans and loans against property. You can check your pre-approved offer online by providing a few basic details such as your name and contact number.
Once decided, proceed to apply with a suitable lender to fulfil your housing dreams conveniently. Make sure to fulfil all the eligibility requirements before applying to ensure hassle-free approval.