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How is land loan different from home loan?

Posted by Balaji on November 17, 2020
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Most people think of buying a new house or a plot of land as purchasing a property. Although it may appear as a similar transaction, the distinction between buying a residential apartment and a plot is not known by many. The most common difference between the two is known when you are applying for loans.

When it comes to buying a house, homebuyers today have two choices: a ready to move in/ under construction flat or a residential plot. Although due evaluation, EMI structures, and the overall investment process in a property may seem equivalent, there are some significant differences that may help you make an informed decision.

Purpose:

A home loan is availed for ready to move in, under-construction or resale properties. On the other hand, a land or plot loan is availed for the purchase of a piece of land that will be used primarily for residential purposes. It is not possible to use a home loan for the purpose of buying land on which you plan to build a building. In the same way, if they wish to buy a ready apartment or villa, one does not apply for a land loan.

Duration and EMI structure:

In any form of a loan application, duration and EMI structure play a significant role. In contrast to land loans, home loans have a longer repayment period. The term of a home loan can be as long as 30 years, while in most situations, a land loan does not exceed 15 years.

Tax Deductions:

On a housing loan, an applicant can make use of tax deductions on both, the principal amount and the payment of interest. On the other hand, if one applies for a plot loan, he/she can get tax benefits only after the construction of the property on that land, and that too only on the loan sum that was taken against construction.

Documentation:

It is simple and faster for home loans taking nearly 15 days while it takes longer when the applicant applies for a land loan as the banks & financial institutions conduct the verification process.

Loan to Value (LTV):

This refers to the amount of loan that can be obtained against a property.LTV ratio for home loans is about 75-90 percent, i.e. a loan of about 75-90 percent of the total value of the property can be obtained by the borrower. Whereas for plot loans, banks limited the maximum LTV to 80 percent depending on the volume of the loan. This means that you will have to put in at least 20 percent of the funds from your own pocket if you want to buy a land loan for your personal use or for investment purposes.

Often, home loans and land loans are used interchangeably. It is possible to get confused between the terms and conditions of both types of loans, but depending on your query, these key points will hopefully point you in the right direction.

 

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