You can be a house owner in the following two ways:
- Purchase a fully constructed house in a residential apartment or gated community
- Construct a house in the way you want to
Both types have their unique benefits. While buying a flat allows you to transfer your worries to the developer, constructing a house gives you the freedom to design your abode beautifully.
You are at the right place if you have decided to construct a house. But first, you must locate the land on which your beautiful house will come up. But are you ready to spend the money necessary to buy land or construct your house? If you said ‘No,’ you need a loan.
But, which loan is more suitable – a home loan or a land loan? You will have the answer by the end of this article.
Land Loan – What Is It?
As the name suggests, a land loan is a unique loan that provides the funds you need to purchase a non-agricultural plot of land. You can use the land thus purchased to construct a house or as a worthwhile investment.
Although land loan interest rates are usually around 1% more than the prevailing home loan rates, they bring you one step closer to your housing dream.
Indian lenders generally approve land loans when the plot of land is located inside the territorial limits of a Municipality, Municipal Corporation, or Development Authority.
The value of a land loan can be as high as 75% of the land’s current market value. Also, the repayment term usually ranges between ten (10) and fifteen (15) years.
Some lenders mandate that you must start the house construction within two (2) years from availing of the land loan. However, you can also find lenders not specifying such criteria.
Land loans do not make you eligible to claim tax deductions on the principal or interest component. However, if you start house construction, you may claim tax deductions on both components.
Home Loan: What Is It?
Unlike a land loan, a home loan is approved when you already own a plot of land. Home loan terms are usually more favorable than land loans.
You can use the home loan funds to purchase a house or construct it from scratch. The interest rate of home loans is usually 1% lesser than land loan interest rates, and you can choose a repayment term of between five (5) and thirty (30) years.
Additionally, unlike land loans, you can use a home loan to get funds of up to 90% of the house construction value. Home loans also enable you to claim tax deductions of up to INR 3.5 lakh (1.5 lakh for principal repayment and 2 lakh for interest repayment).
Land Loan Vs. Home Loan – Similarities and Differences
The following sections elaborate on the similarities and differences between land loans and home loans.
You can use a home loan to buy or construct a residential property anywhere in India. However, the land loan amount can be used only to buy plots of land in an area under the jurisdiction of a municipal, municipal corporation, or development authority.
Moreover, you can avail of a land loan if you want to buy agricultural property. So, if the property type is any consideration, home loans are more flexible than land loans.
Loan to Value
Loan to Value or LTV refers to the sanctioned loan value against the asset’s actual market value. While the LTV of home loans can be as high as 90%, the LTV of land loans is usually capped at 75%.
So, if you apply for a home loan, you must spend 10% of the house construction/purchase value from your pocket. In contrast, if you apply for a land loan, you must shell out 25% of the plot’s actual market value from your pocket.
Unlike a land loan, a home loan enables you to claim tax deductions of up to INR 1.5 lakh on the principal component and INR 2 lakh on the interest component.
However, since the primary purpose of a land loan is to lay the groundwork for house construction, the actual value of the land and the loan is much lesser than the house construction value.
You can repay a home loan within thirty (30) years. But, land loans must be paid back before fifteen (15) years.
However, the benefit of a land loan is that you can become debt-free much earlier.
Land loan interest rates start from 8.50% for borrowers with a credit score of 800 or more.
In contrast, home loan interest rates start from 7.50%.
On a comparative scale, home loans offer more benefits than land loans. However, the difference in purpose makes these loans different from one another. So, while home loans are used to purchase or construct a house, land loans are used to purchase a plot of land for house construction.
Before availing of a land loan, check whether your lender makes it mandatory to construct a house on the plot of land or not.