Land Loan Vs Home Loan: What Borrowers Must Know

In India, investors often focus on land acquisitions, either as property investments or as sites for residential construction. If you are planning to purchase a plot, you may not be eligible for a home loan; instead, you would need to apply for a land loan.

Home loans are generally available only for properties that are already constructed, under construction, or expected to undergo construction soon. 

Elsewhere, the process of financing a vacant plot of land requires a specific application for a land loan. While land loans are similar to home loans in terms of terms and interest rates, they differ in several important ways.

Property Location and Type

Home loans can be availed of for all types of properties, regardless of their location. Land loans, however, are limited to residential plots. Moreover, the property must be located within the municipal or corporation limits. This means you cannot secure financing for agricultural land or plots in villages. However, once you acquire such a plot, you may be eligible for a home loan to construct a house on it later.

Lower Loan-to-Value Ratio

The loan-to-value (LTV) ratio represents the maximum loan amount you can receive against a property. Home loans typically cover 80–90 per cent of the property value, whereas land loans usually fund only up to 80 per cent of the plot value. This means that when buying a plot, you must arrange at least 20 per cent of the total cost from your own funds.

No Tax Benefits

Unlike housing loans, which are eligible for tax deductions on both interest and principal repayment, land loans do not provide any tax benefits. You can avail of tax deductions only if you are constructing a house on the plot. In that case, the deduction applies only to the loan amount taken for construction, and only after the construction is complete.

Land Loans and NRIs

Non-resident Indians (NRIs) are a significant segment of potential property buyers in India. However, obtaining a land loan as an NRI requires thorough research and can be challenging. Most banks either refuse to provide land loans to NRIs or, if they do, charge a higher rate of interest than standard market rates.

Lower Loan Tenure

The tenure for land loans is generally shorter compared to home loans. While home loans can have a tenure of up to 30 years, land loans typically have a maximum tenure of 20 years. The repayment capacity of applicants is usually considered while setting their loan tenure.

Loans For Land Purchase With House Construction Plans

If you are considering a land loan with the intention of constructing a house soon after purchase, there are some additional conditions you need to consider. 

Most banks require construction to begin within a specified period. Overall, a land loan is typically treated as part of a bank’s home loan offerings. The above-mentioned conditions are the main exceptions. 

In general, the process, documentation, equated monthly instalment (EMI) options, requirement for co-applicants, rate of interest, and due diligence are similar for both land loans and home loans.