How is land loan different from home loan?

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,” says Adhil Shetty, founder & CEO of BankBazaar.com.

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,” informs Shetty.

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 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 NBFCs like Dewan Housing Finance offer 20-year tenure for land loans.

Cap on Maximum Loan Amount: Most banks 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 lakh 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,” says Shetty.

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 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,” observes Shetty.

A land loan is often treated as part of the home loan options provided by a bank 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 bank’s 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.