Land Loan vs. Home Loan: Which One is the Better Option?

Introduction

The Indian real estate market is booming. Demand for houses and land is increasing as loans become more readily available, leading to a rise in construction projects across the country. Although both of these loans are a type of mortgage loan and the lender has conditional ownership of the property in question, there are some differences. Let us have a detailed look at Land Loan vs. Home Loan.

Table of Contents

• Which is Better Plot Loan or Home Loan?
  • Loan Purpose
  • Loan to Value (LTV) Ratio
  • Home Loan and Land Loan Tenure
  • How Are the Tax Benefits Applicable?
  • What Are the Eligibility Criteria?
  • Land Loan vs. Home Loan: Documentation

Investors are also showing interest in commercial properties. However, some experts warn of a potential bubble due to the rapid rise in prices. They advise buyers and investors to be cautious and do thorough research before making any big purchases. It is advisable to keep an eye on market trends and seek advice from financial advisors, which helps mitigate losses in the event of a market correction.

Which is Better Plot Loan or Home Loan?

Are you considering whether to buy a land loan Vs. a home loan? But usually, you will need a large down payment. One may face stricter loan requirements than a home loan. Interest rates on land loans are high because of the risk involved in investing in undeveloped property.

Loan Purpose

Each loan product serves specific purposes when considering a plot loan vs. home loan. A plot loan is specifically designed to purchase a piece of land. A home loan is used to buy or construct a house on that land. It’s important to carefully evaluate your needs and financial situation before deciding which type of loan best fits you.

You can avail of housing finance to buy a new move-in-ready property, an under-construction house (subject to specific criteria), a new house, or a pre-owned house. Understanding the differences between a plot loan and a home loan will help you make an informed decision based on your long-term goals and financial capabilities.

A land loan helps to purchase a plot under the jurisdiction of a municipal corporation. With a land purchase loan, you can buy the following types of plots:

• Non-agricultural plots
• residential land
• No land is in the industrial zone
• Plot not covered by dumping ground
• The plot is not in the green zone

Loan to Value (LTV) Ratio

The loan-to-value (LTV) ratio is the ratio of the loan amount that can be obtained against the property’s value. It is generally expressed as a percentage and helps lenders assess the risk of the loan. A lower LTV ratio indicates less risk for the lender. At the same time, a higher ratio may result in higher interest rates or stricter loan terms.

In the case of a home loan, the LTV ratio ranges from 75–90% of the property value. However, due to the higher risk associated with land as collateral, the LTV ratio typically ranges from 50–70% of the property value on a land loan. This means that borrowers may need to provide a larger down payment when obtaining a land loan compared to a home loan. 

The maximum LTV is limited to 75–80% of the plot value, depending on the loan amount. This difference in LTV ratios reflects the higher risk associated with land loans than home loans. Lenders generally require a larger down payment for land loans to mitigate this risk. Land loans are considered riskier because land value tends to be more volatile than homes.

Home Loan and Land Loan Tenure

Home loans have a longer tenure than land loans. The maximum tenure of a home loan is 20 years, while land loans are provided for a maximum period of 15 years. This longer tenure allows borrowers to spread out their repayments over a more extended period of time.

On the other hand, land loans typically have shorter tenures due to the higher risk associated with lending for undeveloped properties. The longer tenure for home loans also means that borrowers may pay more interest over the loan life than for land loans. Borrowers should carefully consider their financial situation and long-term goals before deciding between a home loan and a land loan.

How Are the Tax Benefits Applicable?

Plot loans do not qualify for tax benefits. But housing finance does. This is an important difference to consider when deciding between different types of loans. You can reduce your taxable income by claiming a deduction of INR 1.5 lakhs under Section 80C of the Income Tax Act. Not only that, subject to a limit of INR 2 lakh, the interest paid is exempt under Section 24.

Homeowners can deduct mortgage interest from their taxes, making housing finance a more financially viable option in the long run. Housing finance generally offers lower interest rates compared to plot loans, leading to significant savings over the life of the loan. It is important to assess both the short-term and long-term financial implications while deciding between plot loans and housing finance.

What Are the Eligibility Criteria?

Home loans have easier eligibility criteria than land loans. They generally require a lower down payment and have longer repayment terms, making them more accessible to a wider range of borrowers. Home loans often come with fixed interest rates.

Provide stability in monthly payments over the life of the loan. On the other hand, land loans may have stricter requirements and higher interest rates because of the higher risk of buying undeveloped land. Borrowers seeking a land loan have to provide a large down payment. Below are the step-by-step steps to qualify.

• Only those who have completed 21 years of age can apply for loans
• On the due date of your last EMI, your age should be 75 years.
• Property area must be more than 150 square feet
• You can borrow up to INR 3 Crores

Land Loan vs. Home Loan: Documentation

Looking at the differences between Land Loan vs. Home Loan, the documentation required for both loans is also similar to some extent. The following papers are important for you for instant home or land loan approval.

• Aadhaar Card/E Aadhaar issued by UIDAI
• PAN card
• A valid passport
• Driving License issued by Regional Transport Office (RTO).
• Voter Identity Card issued by Election Commission
• Last 2 years’ Income Tax Return (ITR)
• A balance sheet containing notes to accounts
• Profit & Loss (P&L)
• A recent 6–12-month bank statement of all active business accounts
• Last 1 year’s GST return if available
• Details of current loans
• Bank statement showing the previous 6 months’ EMI payment/ SOA of running loans

Conclusion

Land Loan vs. Home Loan When comparing loans, the difference between the two is not much but the loan is processed in the same way. A home loan is more profitable than a land loan. Furthermore, tax exemptions also apply. Hence the amount taken on land is less. If you take a home loan, there is a higher loan and a longer-term limit. For more information, visit openplot.

Frequently Asked Questions