Buying a plot of land might be a good investment. You can get handsome returns after a few years due to the constant rise of property prices.
Moreover, you can build a house on the plot if you wish and live your life in complete freedom.
If you don’t have the funds, you can take a land loan from a bank or NBFC.
Now, land loans are different from home loans. There are some similarities between the two. However, they are not the same.
Let us look at the difference between these two types of loans so that you don’t get confused.
Loan to Value
LTV or Loan to Value is the percentage of the property’s value your lender wants to give you as a loan. For home loans, lenders can lend you up to 85 per cent of the value of the property. However, the LTV of land loans is lower. It is not more than 75 per cent.
So, if you wish to buy a plot, you will have to bear around 25 per cent of the cost from your savings.
Location and Nature of the Property
The location and nature of the property do not matter much for home loans. The lender will give you a home loan for a property under construction or one that exists.
The lender, however, checks the location and nature of the plot before granting your loan. For instance, the plot must be residential. Moreover, it should be located in the municipal area. Plots located in villages and agricultural lands are not eligible for loans.
You can get tax benefits for taking a home loan. How? Well, you are eligible for income tax deductions on interest payments. You will get a maximum deduction of Rs 1.5 lakhs in one financial year.
However, land loans are not eligible for tax benefits. But you can get tax deductions only if you build a house on the plot. In that case, the deduction can be claimed only on that part of the loan taken for construction.
Home Loan vs Land Loan Interest Rates
Land loan interest rates tend to be higher than home loans. That is because the former tends to be riskier. However, you can get a lower interest rate if you have higher eligibility.
Home loans can have a tenure of up to 30 years. However, you can repay the loan earlier if you want.
Land loans come with a shorter tenure of 15 years. But, some banks and NBFCs might have a longer tenure of up to 20 years.
Maximum Loan Amount
Banks and NBFCs don’t generally keep an upper limit for home loans. The amount of loan you can take depends on your income and credit score.
However, most lenders have an upper limit for land loans. It ranges from Rs 50 lakhs to 1 crore.
Now that you know the difference between these two types of loans, you can make an informed decision.