Who is eligible?
Although NRIs can easily get a home loan, however, when it comes to the land loan, only resident Indians can get the loan as this loan is not available to NRIs.
What type of property is eligible?
Home loan rules are quite flexible when it comes to the type of properties eligible for a loan. However, when it comes to land, loans are very limited and are limited to specific types of land.
“Lenders usually finance land allocated by development authorities. Nowadays, several builders are offering various projects in which land allocations are made, these lands can also be financed as long as they are legally approved by the lender, ”said Rishi Mehra, CEO of Wishfin.com.
The status of land use becomes critical as lenders provide finance primarily for residential land. Thus, you cannot get a loan for the purchase of agricultural or commercial land. While there are special loans that can be used to purchase agricultural land, however, these loans are not readily available to all borrowers as they target a specific set of borrowers such as marginal farmers or landless workers.
Property location
While the home loan can be taken out even for property outside the municipal area, however, land that is in a village or industrial area is generally not eligible for the land loan. It must be located within the limits of the corporation or the municipality.
Said land should also have a clear demarcation. “The land in question must be identifiable during the visit, so a perimeter wall is mandatory for this,” adds Mehra.
What is the maximum loan amount that can be obtained?
The Loan to Value (LTV) on a land loan differs from that of a home loan. For a home loan, many borrowers get up to 90% of the property’s value as the loan amount, however, the loan amount is lower for the mortgage loan. “In the case of a land loan, borrowers can benefit from 70 to 75% of the cost of the property. This applies to cases where only the purchase of land is financed. Lenders tend to finance more if a client benefits from a land purchase and a construction loan, ”Mehra explains.
While 75% is the upper limit, in practice lenders are more careful both in terms of valuing the land and the amount of loan they are going to lend. So, it is better to expect a lesser loan amount when buying land with a loan and allow for at least 30% or more for the down payment.
| Difference between home loan and land loan | ||
| Type of loan | Mortgage loan | Land loan |
| Who is eligible | Resident Indians and NRIs | Only resident Indians |
| Property type | Residential | Residential |
| Location | All over | Municipal or company area |
| Maximum loan | 90% of the property’s value | 75% of the land value |
| Interest rate | Lowest among personal loans | 0.5% to 1% above the mortgage |
| Mandate | Up to 30 years | Up to 15 years |
| Tax benefit | On the repayment of interest and capital | No |
What is the interest rate?
The interest rates on home loans are among the lowest of all loans. However, the same is not true with the land loan because it has a higher rate.
“The interest rate for a mortgage is 0.50% to 1% higher than that of a mortgage. Currently, the interest rate for land loans starts at 7.05% (HDFC Ltd) for a loan amount of up to Rs 30 lakh. It varies with each lender, ”Mehra explains. The interest rate on a HDFC and SBI home loan starts at 6.75% for female borrowers.
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What is the term of the loan?
Home loans offer one of the longest loan repayment terms of up to 30 years. However, the term of the land loan is not that long. “Land loans are available for a shorter tenure compared to home loans. The maximum possible duration of land loans is 15 years. Lenders like SBI offer ten years of tenure in the event of a land loan, ”explains Mehra.
No tax advantage on the land loan
While the mortgage principal repayment for independent property and the interest payment qualify for an income tax deduction under section 80C and section 24b respectively. Such a tax benefit is not available on a land loan.
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Tax advantages on the mortgage to know
Composite loan related to construction
Composite loan is a loan granted by lenders for the purpose of purchasing a piece of land or land and building a house on it within a specified time frame. You can get around 70-75% of the value of the land as a loan for this purpose.
“One of the most important terms of a composite loan that clients are not aware of is that there is a construction time limit attached to this facility. Borrowers must start construction in 3 to 5 years, this period varies from one lender to another, ”explains Mehra.
The part of the loan intended for construction is only disbursed once the borrower fulfills specific conditions. “When requested, they are required to provide an estimate of construction costs and an approved plan from the local authority as well as a chain of documents for the land. The construction loan is only disbursed once the foundation work has been completed on the ground ”
Until construction begins, the borrower has to pay a higher interest rate, such as a land loan. “The composite loan has an interest rate identical to that of a home loan. However, the borrower has to pay a slightly higher interest rate, like a land loan, until he does not start construction, ”Mehra adds.