When we refer to the word land loan, an air of confusion might hover around as this term is often loosely related to the home loan segment. However, home loans, land loans, and composite loans differ from each other in various aspects. A home loan is meant for the construction or rehauling of a property, a land loan is meant for the purchase of a plot meant for residential purpose while a composite loan is for both plot purchase and construction on it. A borrower must be aware of the above-mentioned details to avoid any future disturbances.
Land loans and the facts that must be known to a borrower:
Higher EMI and shorter tenure: The equated monthly installment (EMI) is higher in a land loan compared to a home loan. The reason for such terms are generally because of land loans, or plot lands are sanctioned for a shorter tenure. Alongside the tenure of loan repayment is higher in the case of housing loans with a maximum period of 30 years. Land loans are approved for a shorter tenure of 15 years, though certain financial institutions stretch the time limit up to 20 years.
Loan value ratio (LVRs): The loan value ratio is the total loan amount a borrower can avail against his property. The LVR for a land loan is 70% of the cost of the plot, whereas you can get to 80-85% of the value of a property in a home loan. This capping limit is eventually reduced incase the plot purchased is located in a small town or rural area. The buyer must be aware of the fact that the remaining expenses have to be financed through his personal pockets.
Tax deduction: Another substantial drawback for land loan borrowers are that there are no provisions of tax deductions from income tax during the repayment of the loan amount. The benefits of tax deductions on both interest and the principal amount are given to the borrowers of home loans. During construction of home and repayment, the deductions are offered in matters of a home loan.
Foreclosure charges: There are no foreclosure charges at the time of home loan disbursement. A land loan qualifies for an additional foreclosure charge, which the borrower has to pay at the time of disbursement of the loan amount.
Capping on loan amount: Just like the loan value ratio, there are also capping the maximum amount sanctioned for a land loan. It is better to get all the details from your shortlisted banks and financial institutions before proceeding for a land loan.
Legal compliances: The legal compliances of a plot of land are more stringent than that of a home. There is a strict provision to buy a piece of land for non-agricultural purposes. Relevant documents and facts have to be approved by local governmental authorities during the time of purchase. To be on a safer side, a purchaser can consider buying a developed plot from a builder. Most importantly, it is essential to know all the legal restraints before purchasing land or applying for a land loan.
No land loans for NRIs: The potential buyers of land in India primarily tend to be a non-resident Indian. However, NRIs are not eligible for land loans, and even if some banks or NBFCs offer it, then interest rates charged are on a higher side.
In most of the cases, the borrowers don’t go through the details of a land loan, and hence, it is better to be an alert regarding the terms and conditions before applying for such loans.
More About the Author
A passionate writer on finance Tushar Sharma is a financial advisor with an experience of more than 6 years. He has worked with top-most financial firms and has been a visiting faculty at many reputed institutes in India. Currently based in Delhi, Tushar Sharma is a passionate writer and loves sharing his knowledge on the subject.