For many, owning their own home is one of the biggest milestones in their life. Acquiring a plot of land is often the first and most expensive step to this. Due to exorbitant land prices, most people require a loan to purchase land. Since the land appreciation rate is often higher than plot loan interest rates, buying a plot of land with a loan is an economically viable option. Availing such a loan has become even easier with Bajaj Finserv’s pre-approved offers. Share a few details and get your pre-approved loan.
Before applying for loan to purchase land for home consider these factors:
1. Type of land you want to purchase
One of the most important things to consider is the type of land you want to purchase. You must know whether you want it for your primary residence, for agriculture, or as an industrial plot before you apply for a loan. Plot loans are generally available only for land to be used for residential purposes.
2. Location of Plot
Another factor to take in to account is the geographic limitation of plot loans. Your plot loan will only let you buy plots located within a particular municipality or corporation. Thus, you will not be able to purchase areas located in other villages or on even on city borders with a loan.
3. Tenure of Home Loan
While home loans can stretch for a tenor of up to 30 years, plot loans can be availed only for anything between 15-20 years. Choose your tenor carefully after considering your plans and repayment capabilities.
4. Purpose of Purchasing Land
Before purchasing a piece of land, know the use that you are going to put it to. Know whether you want to build your own home, a residential complex, or use it as an investment for future resale. Building on a purchased piece of land attracts a lower rate of interest, as doing so provides the lender a sense of security.
5. Lender’s Risk
Before approving any loan, lenders consider several factors to determine the risk profile of a loan application. These factors include, the purpose of land purchase (investment or self-use), construction timeline (a shorter timeline is less risky for the lender), and existing loans. Keep these factors in mind when you go looking for a loan to fund your own plot of land.
Penalty for non-commencement of construction
The majority of financial institutions refrain from approving plot or land loans if the borrower does not have robust repayment plans. Plots do not generate any income; hence, paying the EMIs can become a problem for the customer.
Hence, lenders add a clause in the loan agreement for the commencement of construction in the property. Not starting construction can attract penalties like:
- Increase in interest rate by up to 2% on the plot loan.
- Foreclosing of loan before the tenor ends.
It is advisable that borrowers check the stipulated period which the lender grants for the commencement of construction when availing a plot or land loan.
Commencement of construction
The commencement of construction is a clause added to plot loans, unlike composite loans. Composite loans provide funds both for the purchase of a plot and construction of the property on it. Many a time, customers are not aware that the cost of construction is included in this loan.
On the other hand, plot loans provide funds only for the purchase of a land. However, lenders add a clause where borrowers have to begin construction within a stipulated period. This period can range from 2 to 5 years. Individuals can avail a plot loan and enjoy the stipulated grace period if they don’t have any plan to construct a property soon.
Loan to value ratio
The loan to value ratio or LTV is the ratio between the loan amount and actual cost of the property you are purchasing.
LTV of plot loans usually range between 60 to 70%. Meaning, a lender will provide Rs. 6 to Rs. 7 Lakh if you want to purchase a plot costing Rs. 10 Lakh. LTV on home loans are the highest. The RBI mandates the LTV of 90% for a loan value of up to Rs. 30 Lakh.
Borrowers need to pay additional charges while making prepayment of the plot loan. Prepayment either lowers your EMIs or reduce the loan tenor. Thus, it helps you save on interest.
The majority of lenders do not charge prepayment fees to individual borrowers. Non-individual borrowers like HUF, companies, firms, sole proprietorship, etc. have to pay these charges.
There are various complexities attached with purchasing a plot. For example, you may have to go through a prolonged process of mutation. Also, certain states in India do not keep digital records of a plot, which can increase the legal compliance even more. Hence, it is more beneficial to opt for residential plots that have all the necessary chain of documents ready for ownership.
Income tax benefits on land loan
Land or plot loans don’t offer income tax benefits, unlike home loans. You can only claim exemptions from your taxable income if you construct a property on it with a loan.
Be advised that you cannot claim deductions under Section 24(b) on your home loan interest paid during the construction phase. You can do so only after the construction is complete in 5 equal instalments.
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