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Difference Between Home Loan And Land Loan

IndianMoney.com Research Team | Updated On Monday, July 23,2018, 11:44 AM

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Difference Between Home Loan And Land Loan

 

 

 

While some banks offer home loans to construct or purchase a house and to buy land too, there are loans which are offered only to buy land. Home loans and land loans are not the same. They are similar in many ways, but they have differences.

In this article you will find out the answers to two questions:

1. What are the differences between a home loan and land loan?

2. Which one is suitable for you?

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Difference between a home loan and land loan

 

Both home loans and land loans are offered by banks and Non-Banking Financial Companies (NBFCs). The applicants must be Indian residents over 21 years of age. Composite loans can be availed to buy land and construct a house on it.

 

1. Purpose:

 

a. Banks grant home loans:

  • To purchase a house or apartment
  • To construct a house.
  • To purchase a house which has been approved for construction.

 

b. Banks grant land loans:

 

2. Regulations:

 

a. A home loan is available to purchase any property, irrespective of location, size, and so on.

 

b. A land loan has certain regulations like:

  • The land in question needs to be used for residential purposes only.
  • The land should be a non-agricultural and non-commercial property.
  • The land should be situated within municipal/corporation limits.
  • The land should not be in an industrial area and village.

 

3. Loan To Value Ratio (LTV):

 

The Loan To Value (LTV) ratio is used to express the amount of loan that you can get, to the value of the asset in question.

 

a. In case of a home loan, banks grant a loan amount of up to 80-85% of the property value. In some cases, the LTV goes up to 90%.

 

b. Contrastingly, banks grant a lower LTV in case of land loans. The maximum LTV is 70% of the plot value. You have to fund a good 30% of the costs from your own pocket.

Moreover, if you are planning to buy land in smaller cities, the maximum Loan To Value (LTV) ratio can be even lower at 50-60%.

 

SEE ALSO: 14 Situations In Which You Can Partially Withdraw EPF Money​

 

4. Interest Rate:

 

Banks charge almost the same rate of interest on a home loan as the land loan. However, the rate of interest charged on land loans are usually a few basis points more than home loans (100 basis points equal 1%).

The interest rate also depends on the borrower’s profile.

 

5. Tenure:

 

The tenure for home loans is higher in comparison to land loans.

 

a. The tenure for home loans can be anywhere between 20 to 30 years.

 

b. The land Loans have a maximum tenure of 15 years. However, some NBFCs offer a 20 year tenure.

 

6. Tax Deductions:

 

When it comes to taxes, a home loan gives you a lot of tax benefits.

 

a. You can claim tax benefits on the home loan EMIs that you pay.

  • Interest paid towards home loans are eligible for tax deductions under Section 24(b) of the Income Tax Act, 1961.
  • The principal repayments are eligible for tax deductions under Section 80C of the Income Tax Act, 1961.
  • You can claim tax deduction under Section 80C for stamp duty and registration fees paid.

 

b. The biggest drawback of a land loan is that you do not get any tax benefits on it.

 

7. Other differences:

 

The documents and their legal verification (due diligence) for land loans, is as stringent as home loans.

 

Conclusion:

 

You must have got the answers to the two questions mentioned at the beginning of the article. You need not avail a home loan to buy a plot of land. You can avail a land loan for this purpose. However, land loans have certain shortcomings. Based on the purpose of buying the land, you should avail the suitable loan. So, be wise and avail loans according to your needs.

 

Be Wise, Get Rich.

 

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IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

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