India is a country where traditionally people invest in land and real estate plays an important role in the life of our countrymen, many view it as an asset and use it to their build their houses.
From the POV of a buyer, both buying a piece of land and buying house could be the same. But to a bank or an NBFC they are 2 different entities. Though the process, documentation and loan criteria are same there are some intrinsic difference that you need to be aware of.
Type and location of the property
A home loan can be obtained for any residential property located anywhere, but the same cannot be said for land loans which cannot be obtained if the land is not within a corporation or municipality. Also, many people buy land for the purpose of agriculture which cannot be funded using land loans.
Additional Reading: Pre approved mortgage loans
No tax benefits for land loans
There is no tax benefit available for land loans. Home loans can be claimed each year under section 24 for the interest for Rs.2 lakhs and on the principle paid under section 80c up to Rs.1.5 lakhs. This tax benefit is available only if you are constructing a home and not for any loan used to buy land.
Lower Loan to Value (LTV) for land loans
Each bank or NBFC who provides home loan allocate only 80% to 90% of the property or project value. This is to make sure the borrower is also invested in the property and make sure they pay the loan on time. In the case of land loans this LTV is at 70% to 75% of the land value. Thus, the buyer needs to pay more from their side.
Lower tenure for land loans
The loan tenure (the repayment period) is lower for land loans compared to home loans. The maximum most lenders offer for land loans is 15 years with very few offering 20 years. At the same time home loans are provided for up to 25 to 30 years. This lower tenure means you will have to pay higher EMIs
No loans for NRIs
NRIs or Non-Resident Indians are prominent investors in the real estate market. With more money to spend due to available of funds from stronger exchange rates they are darlings of the industry. But to buy a piece of land through land loans the NRIs need to become Sherlock Holmes as they have to do an extensive search to find a bank willing to provide land loans to NRIs.
Limit on maximum loan amount
For land loans the maximum loan amount that banks are willing to allocate varies between Rs.50 lakhs to Rs.1 crore. While for a home loan the maximum loan amount varies between Rs.5 crores to Rs.10 crores. So, if a person is trying to buy a large piece of land they will have to spend a lot from their own pocket.
Dual purpose loan for land purchase and home construction
Lenders provide loans where the borrower can buy the piece of land and construct the home. Here banks or NBFCs will provide the loan under the condition that the borrower will complete the construction of the house within 2 years of buying the land. Some banks even say that construction needs to be completed within 2 years from the date of fund disbursal.
As mentioned earlier there is not much difference in the process involved in applying or disbursal of funds, bank’s due diligence, interest rate etc. for a home loan or land loan. In fact, home loans and land loans are combined under the same category as home finance. They only differ from the above-mentioned points.