Purchasing a new home or a plot of land may not appear to be different to many people and both purchases would be referred to as buying property in common parlance; however, there are differences which must be considered while looking for loans.
Home loans are available for properties that are expected to be constructed in future, under construction, or for ready properties, while land loans are available for purchasinga plot of land for building a house or for investment purpose. However, there are some similarities between the two types of loans too.
Let’s consider the similarities and differences between home loans and land loans.
Irrespective of whether you apply for a home loan or a land loan, the due diligence process undertaken by the lenders for processing both types of loans is essentially the same.Furthermore, the EMI options offered by lenders and rules for co-applicants are also similar for both home and land loans.
Location of property and purpose
Home loans can be availed for ready properties, properties under construction or to be self-constructed. On the other hand, land loans are availed for the purchase of a plot of land, provided the land will be used solely for residential purposes.
Loan to Value ratio(LTV)/Loan to Cost ratio(LCR)
LTV/LCRratio is the extent of the loan amount that you can get against a value/cost of the property. LTV/LCR ratio for home loans is at around 75-90% (i.e. the borrower can usually get a loan of around 75-90% of the value/cost of the property depending upon the loan amount). 1In case of a land loan, the maximum LTV is capped at 75-80% of the property value depending on the loan amount2 . So, if you are considering buying a plot of land for either personal use or as an investment, you would need to make a down payment of a minimum of 20% of the plot value.
Tenure of the loan
The loan tenure for home loans is much longer in comparison to land loans. Home loans are available for a maximum tenure of 30 years3 whereas land loans are available for a maximumtenure of 15 years.4
If you take a home loan, you can avail tax deductions on both, the principal repayment as well as payment of interest. On the other hand, land loan is not eligible for any tax benefits. If, however, you construct a home on the plot of land, tax deductions are available, but only for the loan amount taken against construction. These benefits can be availed only after completion of the construction activity.
Summary of the differences between home loan and land loan
|HOME LOANS||LAND LOANS|
|PURPOSE||Purchase of constructed
or under construction
|Purchase of a plot of
land only for residential
|TAX BENEFITS||Tax benefits applicable
for both principal and
|Tax benefits applicable
only to cover construction
|TENURE||Up to 30 years||Up to 15 years|
|LOAN TO VALUE||Varies between 75 to 90%||Varies between 75 to 80%|
Despite the differences between home loans and land loans, the application process and loan interest rates are similar for both.