Land Loan Vs Home Loan - Which One is Better?
Dec 12, 2023
Choosing between a land loan vs. a home loan or a plot loan vs. a home loan hinges on individual needs. A home loan on a plot or a home loan for land caters to vacant land purchases, while a home loan finances built properties. Compare interest rates, loan terms, and property intent. Home loans offer lower rates and extended repayments for immediate construction. Conversely, land loans, with tailored terms for undeveloped property, are suitable for future development or investment. Align your choice with objectives: opt for home loans for immediate construction, while land loans better suit future development or investment endeavours.
Difference between Home Loan and Land Loan or Plot Loan
Understanding the difference between home loans and land loans or plot loans is crucial. Here’s a detailed analysis of the same.
| Loan Aspect |
Home Loans |
Land Loans |
| Purpose |
Purchase/Construction of Residences |
Investment in Undeveloped Land |
| Loan to Value Ratio |
Higher |
Lower |
| Loan Tenure |
Longer |
Shorter |
| Eligibility Criteria |
Credit Score, Property Valuation |
Land Potential, Financial Stability |
| Tax Benefits |
Extensive |
Limited/None |
| Interest Rate |
Typically Lower |
Slightly Higher |
| Documentation |
Extensive |
Complex due to Land Surveys, Zoning |
Location of Property and Purpose
Home loans cover residences like houses or apartments, while land loans focus on undeveloped plots. Home loans aid in buying or building residences, while land loans target acquiring undeveloped land for future use, marking the distinction between both loan types based on their intended purpose.
Loan to Value Ratio(LTV)/Loan to Cost Ratio(LCR)
Home loans generally offer a higher LTV or LCR compared to land loans. Home loans incorporate the property's value along with construction costs, enabling a more significant percentage of financing. Conversely, land loans often come with lower ratios due to the higher risk associated with land without any built structures.
Read More: What is Loan-to-Value (LTV) Ratio and Why is it important
Loan Tenure
Home loans typically come with longer repayment periods, often extending to decades, making them favourable for borrowers seeking extended repayment schedules. Land loans, on the other hand, might offer shorter tenures due to the higher risk and the absence of an immediate asset to offset the loan.
Read More: How To Choose A Home Loan Tenure That Suits You?
Eligibility Criteria
The eligibility criteria for both loan types differ significantly. Home loans consider factors like credit score, income stability, employment history, and property valuation. Land loans might be stricter, emphasizing factors like the land's potential value, future plans, and the borrower's financial stability.
Tax Benefits
Home loans tend to offer more extensive tax benefits compared to land loans. Deductions on home loan interest payments and principal repayment are often available, contributing to significant tax savings. Land loans usually have limited or no tax benefits, as they are focused on undeveloped land without a residential structure.
Interest Rate
Interest rates vary between home loans and land loans due to differing risk factors. Land loans generally come with slightly higher interest rates compared to home loans, reflecting the higher risk associated with undeveloped land and its valuation uncertainties.
Documentation
Home loans involve comprehensive documentation related to property purchase or construction, income proof, property valuation reports, legal clearances, and more. Land loans may require additional documentation, emphasizing land surveys, potential development plans, and zoning regulations, making the process more intricate due to the absence of an existing structure.
Features of a Plot Loan/Land Loan
Before applying for a plot loan, consider the following points:
- Ensure the plot is within municipal or corporation limits
- Agricultural land isn't eligible for the loan
- Avoid industrial or village areas for the chosen plot
- Loan tenure extends up to 15 years
- Tax benefits apply post-completion of construction only
- Loan-to-value (LTV) ratio offers up to 80% (70% of property cost as the loan)
- Obtain a plot loan for direct allotment or resale plot purchase, depending on the lender
- Consider these criteria when applying for a plot loan to make an informed decision.
Features of a Home Loan
Here are some of the features of a home loan:
- Home loans cater to property purchases across locations
- Extended tenure up to 30 years for easier repayments
- Tax deductions are available, boosting loan benefits
- LTV ratio reaches up to 90%, lender-dependent
- Joint home loans allow separate tax deductions for spouses with individual incomes
- Approved builders offer various property types (apartments, bungalows, row houses)
- Government authorities, housing societies, and private properties qualify for home loans
- Explore diverse options to align a home loan with your preferences and needs.
Similarities in home loan and plot loan
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- Eligibility criteria, interest rates, and application procedures align for home and plot loans, subject to slight variations by the lending institution.
- Loan approvals rely on your credit score, irrespective of whether it's a home or plot loan application.
- Understanding the unique purposes and features of each loan type facilitates choosing the most suitable option.
- Opt for a loan that matches your needs, whether it's for an immediate move-in residential property or a future construction plan, aligning precisely with your preferences.
Conclusion
In conclusion, home loans prove advantageous for immediate construction, offering lower interest rates and extended repayment periods. On the other hand, land loans cater to those eyeing future development or investment in undeveloped properties, providing tailored terms for such ventures. Understanding the distinct advantages of each loan type ensures making an informed decision aligned with one's present and future real estate aspirations. With that being said, explore our financing options today and step confidently into the realm of real estate with SMFG Grihashakti home loans. Apply now and turn your housing dreams into a tangible reality.
FAQ's
Are the land loans and home loans the same?
No, land loans and home loans differ in their purpose and terms. Land loans specifically finance the purchase of vacant land, while home loans are designed for buying built properties. They vary in eligibility, interest rates, and repayment conditions, tailored to suit the distinct needs of undeveloped versus developed properties.
Does a home loan include land?
Typically, a home loan covers the cost of the property and the construction of a dwelling on that land. However, the land's share in the loan depends on the lender's policy. Some home loans may include the land's cost, while others might cover only the construction or property purchase on existing land.
Can a plot loan be converted to a home loan?
In certain instances, a plot loan can transition to a home loan when constructing a house on the originally financed land. This requires appropriate documentation and meeting the lender's criteria, enabling the loan's conversion to fund the construction on the purchased plot.
Can we show the plot loan as a home loan?
Typically, a plot loan and a home loan are distinct categories of loans tailored for different purposes. While a plot loan finances the purchase of vacant land, a home loan is designed for constructing or buying a built property. Follow legal guidelines to accurately represent the loan's purpose.
What are the disadvantages of plot loans?
Plot loans can pose drawbacks such as higher interest rates, shorter repayment periods (usually up to 15 years), lower Loan-to-Value ratios (around 70-80%), limited tax benefits, and potential risks like land appreciation uncertainty or non-development issues, impacting their investment value.
Which is better: buying a plot or house?
Deciding between buying a plot or a house depends on individual preferences and goals. Buying a plot offers flexibility for custom construction but requires additional investment and time for development. Purchasing a house provides immediate occupancy but might limit customization.
Disclaimer: *Please note that this article is for your knowledge only. Loans are disbursed at the sole discretion of SMFG Grihashakti. Final approval, loan terms, disbursal process, foreclosure charges and foreclosure process will be subject to SMFG Grihashakti’s policy at the time of loan application. If you wish to know more about our products and services, please contact us.