Major Differences Between Home Loans And Plot Loans
Purchasing a new home and buying a plot of land - while both may be commonly referred to as buying property, there are important distinctions to consider, especially when you seek financing. Let’s explore the intricacies of plot loans and home loans which will help you understand their differences and help you choose the most suitable option for your property goals.
What is a home loan?
A housing/home loan is designed to assist in the purchase of an under-construction or resale property. Importantly, a home loan cannot be used for acquiring a plot.
What is a plot loan?
A land/plot loan is intended for the purchase of a piece of land on which the borrower intends to build a home. A land loan cannot be used to purchase an unfinished or ready-to-move-in property.
Differences Between Home Loans and Plot Loans
Type of loan
The primary distinction between a home loan and plot loan lies in the fact that a plot loan is specifically designed for purchasing residential land, whereas a home loan is typically utilised for the acquisition of residential built-up or under-construction property. When a plot is purchased using a plot loan, there is no fixed timeline specified for its use as a residential house, although the designated usage is solely for residential purposes. On the contrary, with a home loan, applicants have the flexibility to use the loan amount for purchasing a residential property or for the construction of a residential building.
For applicants availing a home loan for a fully built residential property, tax benefits are available on both the interest payment and principal amount. In contrast, individuals taking a plot loan do not have access to tax benefits. The sole tax deduction available for a plot is for the loan amount obtained for undertaking construction on it.
Loan to Value Ratio (LTV ratio)
The loan amount that can be obtained against a property is denoted by the Loan-To-Value (LTV) ratio. Due to the residential collateral associated with a home loan, the LTV is higher compared to that of a plot loan. For loans below 30 lakhs, the LTV can be as high as 90%, whereas for plot loans, it is restricted to 70%. Therefore, whether you are considering purchasing land for personal use or investment, a minimum portion of the purchase price will need to be paid upfront.
Tenure of the Loan
The loan tenure and EMI are crucial factors in any loan application. In comparison to a plot loan, a home loan typically has a longer tenure. In certain cases, the tenure for a home loan can extend up to 30 years, while for a plot loan, the maximum tenure may be up to 15 years, although these terms vary among different banks and financial institutions.
Type of Property
In the case of home loans, only residential properties are eligible for funding. These properties can include freehold resale residential properties, builder flats, or government-approved housing schemes. Home loans are not applicable to properties classified as agricultural or industrial. Similarly, plot loans are only available for residential land. The plot's location must be within municipal or city limits, not within a village. Similar to home loans, plot loans cannot be obtained for the purchase of agricultural or industrial land.
The interest rates for plot loans are higher in comparison to home loans. Currently, home loans are available at around 7.50% per annum, while plot loans are priced between 8% and 10% per annum. This higher pricing for plot loans is due to the comparatively higher risk they pose. Banks have readily saleable collateral with home loans, making it easier for them to recover losses if necessary.
Making the Choice: Plot Loan Vs Home Loan
When deciding between a home loan and a land loan, it's essential to consider your individual needs and aspirations. If you're seeking a ready-made property, a home loan offers a straightforward solution. Alternatively, if you have a vision for building a distinct home, a plot loan could be the perfect fit.
The differences between a plot loan and a home loan are numerous. Nonetheless, both are instrumental in fulfilling your property aspirations, be it for plots in Madhavaram, plots in Vandalur or any part of the country. Both these loans cater to distinct purposes and offer varying terms and benefits. So, it's significant to meticulously assess your needs, financial standing, and future objectives to make a well-informed choice. Whether opting for a plot loan or a home loan, selecting the right option can pave the way to the fulfilment of property ownership.