Real estate has historically been popular in India as an investment option. Despite fluctuations in the market and changes in regulations, people continue to find value in this investment. For properties under construction, to be constructed in the future or ready for sale, a buyer resorts to a ‘home loan’. If you’re looking for land – to build a house or simply for investment purposes – you qualify for a ‘land loan’. These two loans are often misconstrued as one due to similarities in the due diligence process and other rules of processing. However, there are many fundamental differences between these two types of loans. Let us explore some of these differences:
Purpose of the Land
A home loan can be taken for any kind of land or location but there are limitations on the purchase of land loans; only eligible on plot/land for residential purposes within municipal limits which are:
- not in the vicinity of a village or an industrial area.
In case of home loans, banks and NBFCs approve the loan if the borrower guarantees construction of property on the land within a specified duration, thus offering greater flexibility. For example, SBI Realty Loan grants you a home loan for construction of a house which should be completed within 5 years from the date of the loan sanction.
Loan to Value Ratio (LTV)/ Loan to Cost Ratio (LCR)
Loan to Value or Loan to Cost ratio measures the loan amount you can get against the value or cost of a property. In case of a housing loan, LTV is usually between 75-90%. On the other hand, LTV is a maximum of 70% in case of a land loan, and the rest of the money will have to be funded by your savings. This LTV figure for land loans drops even further to 50-60% in the case of tier two cities.
This is by far one of the most crucial differentiators between the two loan types. If you own a piece of land, and no construction has taken place on that land, your income towards repayment will be taxed by the government. However, if you are constructing a house on the land, the money used for that work is eligible for tax deductions, both on the principle and the interest amount. The exclusions for this rule include in case of a land loan include tax benefits after the construction of a house; as soon as the construction is complete, tax deductions are applicable.
Loan tenure for land loans usually ranges around 15 years. Some NBFCs could give a tenure of 20 years for exceptional cases. In case of home loans, the years are double – a maximum period of 30 years is granted.
Interest Rates and Processing Fees
As a usual norm, the rates and processing fees for both home loans and land loans are the same, however, in some cases, the home loan interest rates could be a few basis points lower.
Most loans have an upper limit on the amount of loan they are willing to lend for land loans.
Many similarities and differences exist between a home loan and land loan. For a borrower, the most important of these differences is tax deductions which increase his real income. Home loans also offer more flexibility in terms of loan tenure, loan amount, and interest rates. Before deciding between a home loan and land loan, it is crucial to identify and assess these differences carefully.
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