How to choose between a Land Purchase Loan and a Home Loan

When you decide to invest in property, the first thing you need to consider is whether you intend to do so in the form of a house, or in the form of undeveloped land. The loan you apply for will vary based on which type of property you intend to purchase. Here’s a look at the differences between a loan for land purchase and home loan and how they impact you.

Determine whether you qualify for a home loan or land purchase loan

Home loan and land purchase loans may seem similar, but there are major differences in what each of the two allow you to do. Home loans are meant specifically for property that has already been constructed, is going to be constructed, or is under construction. In fact, there is another variety of home loan for under-construction properties called a Home Construction Loan. Land purchase loans cover vacant residential plots only.

For a land purchase loan to cover a property, it must be located within municipal or corporation limits and cannot be agricultural land. Keeping this is mind, you can choose one based on whether you need money to buy an empty plot or a home.

Know the differences in terms between the two loan types

While many terms between land purchase loans and home loans may be similar, and they are often both offered under the generic banner of ‘housing loans’ by many lenders, there are some key differences. Land purchase loans tend to have a shorter tenor than home loan. While home loans have been known to offer you up to 25 years to repay the loan, you may have a maximum of 15 years to repay your land purchase loan.

Secondly, home loans tend to have slightly lower interest rates than land purchase loans, but that also depends on the lender you choose. What’s more, home loans have a higher loan-to-value ratio, going up to 80% in many cases, while land purchase loans are only offered up to 70% of the property value. Lastly, many banks do not offer land purchase loans to NRIs, and if they do, require extensive background checks. Some lenders may also not offer land purchase loans on all types of sales. For example, Bajaj Finserv allows you to take a land purchase loan on both direct allotment and resale plots.

Refinancing options for land purchase loans

Some lenders offer refinancing options for land purchase loans on the condition that you construct a house on the property. In such cases, lenders will often specify in their sanction letters when the construction must begin on the acquired land. Some lenders may stipulate the time frame based on when the loan amount was disbursed, others may stipulate it based on when the loan was approved. It is important to consult your sanction letter for the specific terms, as these vary between lenders.

Tax benefits on land purchase loans for house construction

While home loans qualify for tax deductions for payment of interest and repayment of principal, land purchase loans do not qualify for the same benefit. However, if you use a part of the loan towards the construction of a house on that land, that portion of the loan does come under the tax purview of housing loans and therefore can be eligible for income tax deductions.

Keeping these factors on hand, you can decide whether a home loan or a land purchase loan suits you better. Do check the eligibility criteria for both loans before making your final decision.

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