The terms ‘home loan’ and ‘land loan’ may sound similar. But there are major differences between the two. Let’s look at how they differ.
What is Home Loan?
A home loan is money that you borrow from a bank or financial institution to buy an already constructed house, or under construction house. You can also avail of the home loans to buy a house which will be constructed in the near future or for repairing the house. The financial institution or bank that lends money is called the lender. It lends money for a fixed period at a fixed rate of interest. You have to repay the principal and the interest to the bank in equated monthly instalments or EMI.
What is a Land Loan?
A land loan is for you to buy land for building a home or leave it undeveloped. Thus, you can buy any plot of land either to construct a house or as an investment with a land loan.
Both banks and non-banking financial companies (NBFCs) like Bajaj Finserv offer both home loans and land loans to residents over the age of 21.
Parameters to Qualify for a Home Loan or Land Loan
An applicant is granted a home loan for a house that is
- Already constructed
- Under construction
- Approved for construction
An applicant is granted land loan for:
- Land that will be used for residential purposes
- Land that will be used for non-commercial use
- Land that will be used for non-agricultural land
- Land which is not located in a village or industrial area
- Land within the municipal or corporation limits
Loan to Value (LTV)
LTV means the maximum amount of loan an applicant can get against property. In case of home loan, an applicant can expect a loan amount of 80% to 85% or in some cases up to 90% of the value of the home. This depends upon the repayment capacity of the applicant. While in case of land loans the maximum offering can be stretched up to 70%. This means that an applicant applying for land loan has to put a major amount from his pocket as well to purchase land. But in case the land on which loan is sought is located in rural area or in a small town or city, then the LTV ratio for the land loan can be 50% to 60%.
Rate of Interest
As far as rate of interest on home loan or land loan is concerned, both have similar interest rates. But, the interest on home loan may be lower, may be by 1%. Besides, an extra processing fee is also levied on both home and land loans.
Period of Loan
In case of home loans, the maximum period can be extended up to 30 years whereas land loans are extendable up to 15 years. Certain NBFCs offer land loans for a period of 20 years.
Maximum Amount of Loan
Some banks impose an upper limit on the amount that can be lent as loan for land. Different banks have different ceilings. Some NBFCs offer up to Rs.3 crore for buying land with a top up option of up to Rs.1.5 crore for construction.
If you take a home loan, you can avail tax benefit on the repayment of the principal amount. This is as per Section 80C of the income tax act. The interest component comes under Section 24(b) of the income tax act. In case of a land loan, you cannot avail tax deduction. An exception to this is if the loan is for construction of property. In such a situation, you become eligible for tax deduction only on the amount borrowed for constructing a house on the plot. The tax benefit can be claimed only till the time construction is completed. For example, Mr Roy has bought a land for Rs.10 lakh. But he has borrowed Rs.4 lakh, so the interest paid on this amount is not eligible for tax deduction. But when he borrows an additional Rs.2 lakh for constructing the house on the same plot, then he is eligible for tax deduction on interest paid on Rs.2 lakh. It is easy to get a loan even on urgent basis from NBFCs which offer pre-approved loans. So, decide what is best for you and choose the right lender.