Difference Between Home Loan and Land Purchase Loan Explained

November 01, 2024

home-loan-vs-land-purchase-loan

In India, there are different types of Home Loans, like house purchase loan, home construction loan, plot loan (land purchase loan), home improvement loan, etc. Each of these loans serves a specific purpose. For instance, if you're planning to buy a home or flat, applying for a regular Home Loan would be apt. But if your planning to purchase a plot or land, a more suitable product would be a land purchase loan or plot loan. 

 

In this article, we will dive deep into the difference between home loan and land purchase loan and explore the key considerations that can help you make an informed decision. 

 

What is a Home Loan?

A home loan is a secured loan that offers financing for the purchase of a house or property. For the uninitiated, secured loans are loans that are disbursed against a collateral. In the case of home loans, the house or property you're planning to buy acts as a collateral, meaning the bank becomes a part-owner of the property till you repay the loan in full. In case of loan default, the bank may seize the property to recover the cost. 

 

By the way, you can take a home loan to purchase a land, provided it's a residential plot. However, you need to ensure to construct a house on the purchased land within 2 years from the date of loan disbursal.

Some of the key aspects of home loans are as follows:

  • Allows you to fulfill your dream of owning a home without waiting for years to accumulate enough savings.
  • Provides flexibility in terms of repayment tenure, usually ranging from 15 years to 20 years.
  • Offers tax benefits on both principal repayments (under Section 80C) and interest payments (under Section 24(b)) of the loan. Other tax benefits include Section 80EE and Section 80EEA (subject to terms and conditions). 
  • Your house acts as a collateral till the loan is repaid in full.
  • You can get up to 85% financing of the property price. Rest of the amount has to be paid from your pocket as down payment.
  • Usually comes with a home loan insurance (not mandatory but recommended).
  • Loan is repaid via EMIs (Equated Monthly Instalments). 
  • Two interest rate options available - floating rate loans and fixed rate loans. No foreclosure charges for floating rate home loans.

 

What are Loans for Land Purchase?

Land loan or plot purchase loan is a secured loan designed specifically for land or plot purchase on which you can construct a house or property in the future. Like home loans, it's a secured loan. However, there are certain differences. For example, it's necessary for the land to be within the location limits of the municipality. Interest rates of land loans could be higher than home loans, resulting in higher EMIs.

Key Considerations:

  • Designed specifically for land or plot purchase.
  • Loan tenure is usually shorter, often up to 15 years.
  • No tax benefits offered if you buy a plot with no intention of constructing anything. However, you can avail tax benefits if you take an additional loan to construct a house on the purchased land. But this is allowed only after the construction of the property.
  • Most banks offer maximum 70% financing of the cost of the plot.
  • Loan amount has to be paid in EMIs.
  • Foreclosure charges are generally applicable.

 

Comparing Home Loan vs Land Purchase Loan

Now that we've explored the basics of home loans and land purchase loans, let's compare them based on some key parameters:

 

 Home LoanLand Purchase Loan
PurposePrimarily used for purchasing a house or apartment.Specifically meant for buying a land or plot.
Eligibility CriteriaFactors considered include income, age, credit history, employment stability, and property valuation.Lenders evaluate factors such as location, type of land, future development potential, and borrower's repayment capacity.
Tax BenefitsTax benefits under Section 80C, Section 24(b), Section 80EE, and Section 80EEA (subject to terms and conditions)No tax benefits offered if the plot is purchased only for the purpose of reselling it in the future.

Loan Amount

Ranges between 70% to 85% of the property price.Around 50% to 70% of the land's value.
Loan TenureLonger repayment tenures available, ranging from 15 years to 20 years.Shorter duration compared to home loans. Generally ranging from 5 years to 15 years.
Foreclosure Charges No foreclosure charges for floating rate loans.Foreclosure charges could be applicable.

 

Home Loan vs Land Purchase Loan: Which Loan is Right for You?

Choosing between a home loan and a land purchase loan depends on your specific requirements. Here are some scenarios to consider:

Scenario 1: Building Your Dream Home

If you plan to construct a house on the purchased land, a home loan would be more suitable. It allows you to finance both the land purchase and construction costs under a single loan.

 

Scenario 2: Investment in Land

If your primary objective is to invest in land for future development or resale purposes, a land purchase loan would be more appropriate. It enables you to acquire the land without tying up your existing funds.

 

Scenario 3: Immediate Possession

If you're looking for immediate possession of a constructed property, such as an apartment or house, a home loan would be the right choice as it caters specifically to these requirements.

 

Bonus Tip: Difference Between a Land Loan and Composite Loan

We've come across customers enquiring about composite loans. In simple words, composite loans combine land purchase with construction of house, meaning the loan covers both - financing for plot purchase and construction of house on that particular plot. However, such is not the case for land purchase loans. You can use the loan amount only for land purchase. For house construction, you have to take a home construction or home purchase loan.

Final Thoughts

Apply for a loan based on your requirements. While a home loan is for purchase of house, a land loan is specifically for purchase of a plot or land.

 

Buying a house has never been this easy! Avail Ujjivan SFB’s wide range of affordable home loan products and enjoy a hassle-free loan journey. From house purchase loan and composite loan to plot loans and home improvement loans, we have it all! Alternatively, you can browse through Ujjivan SFB product suite - our wide range of financial products are designed to make your financial life better.

 

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FAQs

1. What are the various property financing options in India?

The various property financing options include home loans, land loans, composite loans, home construction loans, home improvement loans, etc.

2. Which loan is cheaper - home loans or land loans?

Home loan interest rates could be lower compared to land loans. Also, since the repayment tenure is higher, the EMI burden is comparatively lower for home loans.

3. Is it better to take loan for land or home?

It really depends on what you want to buy. If you plan to buy a house, a home loan would be a better option. If you want to purchase a land to build a home or sell the plot at a higher rate in the future, availing a plot loan would be a better option.

4. How much loan for land amount can I get for a land purchase?

Lenders generally provide up to 50-70% of the land's value as the loan amount for a land purchase.

5. How does the interest rate vary between home loans and land purchase loans?

Generally, interest rates for home loans are lower compared to land purchase loans due to the lower risk associated with financing constructed properties.

6. Can I prepay my loan for land before the repayment tenure ends?

Yes, you can prepay your land purchase loan before the tenure ends. However, some banks may charge prepayment penalties or fees. It's important to check the terms and conditions of your loan agreement.

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