In India, it's common for people to purchase an empty plot of land either for investment purposes or to build a house in the future. If you're looking to buy a vacant plot, then you are not eligible for home loans. Instead, you need to go for a land loan (also known as plot loan).
Home loans are only provided for borrowers purchasing an already constructed or under construction home/apartment. On the other hand, if you are purchasing a vacant plot, then land loans are the answer to your finance needs. Though the terms and application process of home loans and land loans are similar, there are some minor differences that you must be aware of.
Key Points to Know about Land Loans
Type and Location of the Plot
Land loans are only available for the purchase of residential plots and not for commercial or agriculture plots. For the latter, you can go for special subsidised loans available to farmers. Additionally, the plot you are purchasing must be located within the Local Corporation or municipal limits. Once you have availed a land loan, you can apply for an additional home loan, if needed, to construct a house on the plot.
Low Loan-to-Value Ratio
LTV ratio is the quantum of loan that you are sanctioned against the value of the plot. Home loans offer finances up to 80 – 85% of the value of the property. Some lenders even finance 90% of the property's market price as the loan amount.
On the other hand, most lenders only offer 70% of the plot value as the loan amount when it comes to land loans. This means you have to finance the remaining amount for the purchase out of pocket. Continue reading this article to find out how you can get land loans without a down payment.
No Tax Benefits
Unlike home loans, borrowers are not offered any tax breaks when they apply for a land loan.
Not available for NRIs
NRIs are one of the biggest buyers of plots in India. However, the majority of Indian banks do not sanction land loans to NRIs and PIOs. Even if they are offered the loan, the interest rate is usually quite steep compared to what's provided to Indian borrowers.
One of the most significant benefits of home loans is that they are offered for long tenures, say around 25 to 30 years. The maximum tenure of plot loans is only 15 years.
Cap on the Maximum Loan Amount
Most banks have an upper limit on the amount that one can borrow under plot loans. The maximum loan amount offered by Punjab National Bank is Rs. 50 lakhs and Indian Bank is Rs. 1 crore for land loans. Make sure to check with your bank on the maximum loan amount, before you apply for it.
Generally, most lenders treat land loans similar to home loans. The application process, documentation, EMI repayment facility, requirement for a down payment, rate of interest are the same as that of home loans.
Now, that you’re aware of the features of a land loan, let’s turn our attention to the question:
How to get a land loan without a down payment?
The first thing you need to know is – down payment is mandatory for land loans.
Is there any way to bypass the down payment for a land loan?
Sadly No! The down payment is mandatory irrespective of the lender you approach. According to the RBI's regulations, all lenders, including commercial banks and NBFCs, do not sanction land loans for the plot's entire value. The down payment helps to reduce the risk for the lender and ensures that the borrower's personal funds are invested in the plot, as well.
The down payment is the amount you pay upfront to the seller for the purchase of the plot. Generally, you have to pay 30% to 20% of the plot's value as down payment, and the rest (70% to 80%) is financed by the lender.
So, what should you do if you don't have sufficient funds for the down payment?
Tips on Raising the Required Funds for the Down Payment
Avail a Personal Loan for down payment financing
You can approach a lender to offer you an unsecured personal loan. You can then use the loan amount to serve as down payment financing. However, note that this is an expensive option. Remember that with a personal loan, you are increasing your overall loan burden. You have to pay the EMIs of the plot loan, but you also have to pay the EMIs for the personal loan. Make sure that you choose this option, only when others do not work out.
Seek a Soft Loan
A soft loan is an informal loan. Generally, it's an arrangement where you borrow from friends and family, to pay for the down payment. Besides your friends and families, sometimes your employers may lend you a helping hand. The most significant benefit of these informal loans is that you can borrow with little or zero interest. However, ensure that you can repay on time, as failure to repay the borrowed amount tends to affect relationships.
If you have a good investment portfolio, it can help you tide over your emergency cash requirements. For instance, check if you can liquidate fixed deposits or mutual fund investments and use the amount to pay for the down payment.
Down Payment is Mandatory for Land Loans
Yes. There is no way you can bypass the down payment arrangement. You may be able to reduce the down payment amount if you can negotiate a deal with the lender. However, there is no way you can skip it altogether.
Use the three smart tips listed here to arrange for a down payment. However, the best way to save for the down payment is by planning for it early. The earlier you start saving for it, the easier it becomes to negotiate the terms with the lender. You can invest in SIPs, RDs, FDs, and other saving schemes to build your down payment.
By budgeting and planning ahead, you can easily arrange for the down payment for the land loan.