Monday 20 May 2024

Home Loan or Land Loan: Which one is ideal for you?

The growth rate of home loans in India has been estimated to be growing at a steady rate of 18%. Another important fact is that 44% of all loan for land purchase and home purchase availed in the country within the last few years have been disbursed by non-banking financial companies (NBFCs). 

Home loans and land loans may sound similar at first glance, but there are quite a few not-so-subtle differences between the two. These differences will be highlighted in this article, which will make sure you understand which one is ideal for you. 

Listed below are the differences between land and home loans: 

  • Location-based eligibility: 

  • Home loans- They can be obtained for renovating or purchasing houses that are already built. No clause restricts you from constructing a house on a plot of land that you already own.
  • Loan for land- In case you want to avail a loan for land, you should understand that your loan for land purchase will not be approved if you plan on purchasing agricultural land. However, in case you already own agricultural land, you are allowed to avail a home loan for construction of a house on that plot. 

  • The ratio of loan to value: 

  • Home loans- You can avail a home loan up to 80% of the value of your mortgaged property. 
  • Loan for land- In case of land loans, the maximum loan an applicant can avail is up to 70% of the property value. The rest 30% will have to be shelled out by the borrower from higher finances. 

  • Tax deductions on these loans: 

  • Home loans: Tax savings you can avail on home loans for interest payments as well as for principal repayment are provisioned under sections 24, 80C and 80EE of the Indian Income Tax Act.  
  • Loan for land: If you avail only a loan for land, you cannot avail tax benefits. However, if you undertake construction on the property by availing another loan, you are deemed eligible for tax benefits only on the additional loan amount. However, these benefits will accrue only after completion of construction of the property. 

  • Tenure of the loan: 

  • Home loans: The maximum tenure allowed by financial institutions and NBFCs is typically up to 20 years, which is higher when compared to a loan for land. 
  • Loan for land: The maximum tenure allowed by financial institutions on these loans is 15 years. However, some NBFCs provide Land Loans with flexible tenures that can go up to 20 years. 

Now that the differences have been established let’s focus on some unique characteristics of loan for land. 

  1. The plot of land should be located under a Municipality or other local development bodies of the government. 
  2. The land must not be agricultural land. 
  3. Land loans are only sanctioned under the condition that construction will begin after a pre-determined period. 
  4. You are liable to payment of a penalty in case of non-commencement of construction within the stipulated period. 
  5. There are no Government schemes for land purchase like Pradhan Mantri Awas Yojana for home loans.

Who should avail a loan for land purchase?

Land loans are perfect for people who want to live in their own house and not flats. Land loans allow these individuals to buy individual plots and construct a house on that land. 

However, if you are planning to avail a loan for land purchase, you must carry out a thorough evaluation of different alternatives taking into consideration your income and fixed obligations and ask for a loan amount accordingly. You must not forget to compare the terms and conditions offered by different lenders. You can also use an eligibility calculator to determine the amount of loan you are eligible for. 

This analysis of alternatives will help you to determine the ideal EMI amount for you. You can also use an EMI calculator to make the job easy for you.