What is the difference between land and home loan?

Property loan is an umbrella term. Due to this, people sometimes feel that home loan and land loan are interchangeable. However, lenders treat them differently. You may be planning to take a loan to buy a piece of land and build your home on it. In this case, you’re applying for a land/plot loan. Home loan is different and borrowers must know how.

“If you want to buy ready-to-move properties, properties under construction or to be self-constructed home, you will get a home loan, while on the other hand, land loans are meant for the purchase of a plot of land for the construction of the home, provided the land/property will be used only for residential purposes,” said Rahul Kumar, founder at The Loanwala, an online retail loan aggregator.

Eligibility and interest rate on land loans

Land loans are available for purchasing a plot for building a house, personal residence or an investment purpose. You can avail of a land loan for the purchase of industrial or commercial development also. But the rate of interest would not fall under home or land loans. It would be on the higher side.

“On an average, if someone borrows a land loan for construction of a residential property, the rate of interest varies between 7.60% – 8.20% per annum” Kumar added.

Getting a land loan creates a different set of hurdles compared to a home loan or loan against property. For example, NRIs can easily get a home loan in the country but land loans are exclusively for Indian residents only.

“Lenders require surveyed boundaries, legal approval or clearance for residential use and you’ll have to check the zoning and land-use restrictions on the property, as well as due access to utilities and public roads,” Kumar pointed.

Often, any land which is situated in a village or industrial area does not qualify for the land loan. A boundary wall demarcating the land is also an essential prerequisite by lenders to approve a land loan.

Difference between land and home loan

The basic difference between a home and a land loan is that while the former can only be used to buy an already constructed or under-construction residential property (house or apartment), the latter can only be used to purchase a plot of land that has been earmarked for residential property construction.

The tenure of a land loan can be maximum up to 15 years while it is available for a period of 30 years in case of home loans. Additionally, unlike home loans where borrowers get a tax benefit on interest and principal repayment, no tax benefit is implied in case of land loans.

A loan-to-value (LTV) ratio in home loan is the percentage of the property value that a bank or financial institution can lend to a property buyer.

“LTV ratio for home loans is at around 75-90% (i.e. the borrower can usually get a loan of around 75-90% of the value/cost of the property depending upon the loan amount). In case of a land loan, the maximum LTV is capped at 75-80% of the property value depending on the loan amount,” HDFC Bank quoted on its website.

Is agricultural land eligible for a land loan?

The end use of land is very important for lenders to approve a land loan as they prefer residential usage only. But what if you want to purchase land for agricultural or commercial purposes? Though there are some special loans available for this these aren’t easily available to everyone as most financial institutions set it aside for marginal farmers and landless labourers.

“For agriculture purposes, the Centre is encouraging the consolidation of land. As part of this, a term loan is available to the tune of Rs. 50,000 to Rs. 10 lakh to individual small farmers / marginal farmers / sharecropper / tenant farmers for purchase of land. Loans are given to individual farmers to make the small and marginal holding economically viable and to bring fallow and wasteland under cultivation and step up agricultural production and productivity,” the Loanwala founder explained.

The loan will be for long term with a maximum period of 9 years including 2 years moratorium. For commercial purposes also, you can approach financial institutions.