Home Loan Vs Land Loan: What’s The Difference?
Banks and other non-financial institutions offer loans for ready-to-move homes and to-be-built houses. They also offer loans for plots someone buys to invest in or build homes. Such loans make it easy for people to afford a property. Home loans and land loans have certain similarities and differences.
Being a leading agent in real estate in Erode, our experts have curated the major differences that exist between home loans and land loans. The aim is to broaden your understanding and help you invest fruitfully into valuable properties.
Home loan vs Land loan
Home loan vs Land loan – Similarities:
Banks located in India make decisions on home loans and land loans to salaried and non-salaried applicants based on the following factors:
- Date of Birth or Age
- Credible sources of Income
- Weighing their ability to repay the loan
- Credit score.
The appraisal process and documentation procedures are almost the same for both, home loans and land loans. The EMI (Equated Monthly Installment) options are also the same for both types of loans.
Home loan vs Land loan – Differences.
Home loans are offered to purchase a house or property under construction. They are also offered on the purchase of ready-to-move homes. On the other hand, banks and other institutions offer land loans to purchase a plot of land intended to be used for residential purposes only.
- Property Location
Considering home loans, the property can be located anywhere. When we evaluate the eligibility constraints, home loans are flexible and do not carry any major restrictions.
Whereas land loans have constraints and restrictions. The plot or property should not be located in an industrial area or on village premises. You must note that the land loan cannot be used to buy land for agricultural or commercial purposes. The plot of land should be located within the limits of the municipality or corporation. They can be in a housing society or plots for resale in a development authority project. The plot must be approved by an authority as eligible to be used for residential development purposes.
- Tenure of the loan
Home loans have some of the highest tenures for repayment. In India, home loan repayment goes up to 30 years. Yet, the tenure of land loans is shorter than that of home loans. The maximum time offered for repayment of land loans is 15 years.
- Interest rate
Home loans carry some of the lowest interest rates when compared to other loans offered by banks and other institutions. On the other hand, the interest rate for land loans is way higher than that of home loans. Plot loans are considered to be riskier than home loans. This is so because, in the case of home loans, the banks will have collaterals that they can sell and recover losses at a greater pace than land loans.
- Loan To Value ratio (LTV) and Loan To Cost ratio (LTC)
LTV refers to the value of the loan that you can avail against the value of the property, while LTC is the value of the loan that you can seek against the cost of the property. For home loans, the LTV or LTC can go from 75% to 90%. This means that the borrower is eligible to seek a loan of 75-90% of the property. On the other hand, in the case of land loans, there is a cap on LTV and LTC, and one can avail of loans for up to 80% of the value, depending on the loan amount. If you are planning to purchase a plot for use as an investment or other purposes, you need to make a down payment of 20% of the plot value.
- Tax benefits
When you avail yourself of a home loan, you are eligible to apply for tax deductions on both the principal amount and the interest amount. Principal and interest paid on home loans qualify for income tax deductions under 80C and 24b, respectively. Whereas with a land loan, you cannot seek tax benefits. When you construct a home on a plot, it qualifies for tax benefits. Such benefits can be sought only after the completion of the construction activities. The portion of the land loan that you have used for construction can be deducted from the taxes.
This remains a point of discussion when individuals have to make a decision to invest in a home loan or land loan.
Home loans do not have major eligibility requirements. Non-Resident Indians (NRIs) are allowed to get a home loan. On the other hand, when it comes to land loans, NRIs are not allowed to avail themselves of a land loan. So, when you are an NRI, you are eligible to invest in a house for sale in Erode, whereas there are constraints when you have to invest in land for sale in Erode.
Home loans and land loans have both similarities and differences. They are similar in terms of documentation and appraisal procedures. While they have differences in terms of eligibility, tax benefits, interest rates, LTV and LTC values, and so on.
Sweet Spring Properties is a leading real estate agent and land developer in Perundurai. When you invest in houses or plots, it is only natural for people to be confused about the rates and eligibility. A consultation with our experts could help answer all your questions. Beyond, if you are looking for Land for sale in Erode or a Plot for sale in Erode, you are in the perfect spot.
Can a plot loan be converted into a home loan?
It is impossible to convert a plot loan into a home loan. In that case, we recommend that you apply for a composite loan, which combines the cost of construction and the cost of the plot or land.
Is it possible to claim tax exemptions on plot loans?
No, plot loans and land loans are not eligible for tax exemptions.
What is the prepayment of a home loan?
Home loans can be paid off before the loan tenure using surpluses from the loan or through other financial arrangements.
How to reduce interest on home loans?
To reduce the interest on home loans, take them only for a short tenure. The lesser the duration is, the lesser the cost of home loans. Making prepayments on a regular basis also brings down the cost of home loans.
Can I take a loan for the plot?
Banks offer loans to purchase plots not intended for agricultural and commercial purposes. The plot should be located within the limits of the municipality or corporation.