What is the Difference Between Home Loan and Land Loan?

If you are planning to buy a residential property for real estate investment purposes, you may be confused if you should opt for a land loan or home loan. Firstly, you should know that home loan is only applicable only to residential properties already constructed, under construction or to be constructed.

There may be many similarities between the two types of loan in terms of interest rate and process but they do have some substantial differences between them.

Similarities:

Banks or non-banking financial companies (NBFC) offer land as well as home loans to Indian residents over 21 years of age. NRIs can also take a land loan from some banks if the land is going to be used for residential purposes. Both charge additional processing fees. Note that in a few banks, the home loan interest rates could be less than for a land loan.

Difference between a home loan and land loan:

You need to understand the usage limits on a home or land loan so as to decide which one to apply for.

Location of the property and purpose

A home loan can be taken for any kind of location. A land loan, on the other hand, is only given for a residential plot located within municipal or corporation limits, which you can use to build a house later with the help of a home loan.

Funding of a land loan cannot be applicable for

• agricultural or commercial purposes
• land in an industrial area or a village

Additionally, some banks will only provide a land loan if the borrower guarantees to begin construction of the house on the plot within the time decided on the loan terms of the bank. For example, under the SBI Realty loan, one needs to guarantee construction of the house within 2 years of allotting the loan.

 

Loan to Value (LTV)

LTV is the extent of the loan amount that you can get against a property. You can get up to 80 to 85 percent or even 90 percent in some cases to fund your house in a home loan.

In the case of a land loan, however, the maximum LTV you can expect is 70 percent. It means that you will have to get at least 30 percent of the funding on your own to buy a plot.

Tenure of the loan

The tenure of a land loan is lower than a home loan. It can go to the maximum period of 15 years, whereas, it can go up to 30 years in the case of home loans. With exceptions, some NBFCs can go up to 20 years for land loans.

Limit on loan amount

There a limits imposed by some banks on the maximum amount that can be lent for land loans. It is best to inquire with various banks on their limits before you shortlist the one you wish you take a loan from.

Tax benefits

Tax deduction can be claimed on interest as well as principal amount payment in case of home loans. This exemption is not available on land loans. It is however available on land loan taken against construction of a house on the plot and only after the construction is complete.