Difference Between Home Loan and Land Loan

31-Aug-2024 | Home Loan

When a person plans to purchase and finance a property, there comes the choice to opt for a land loan or a home loan. These two loans comes with specific conditions and terms to serve particular purposes. To have a good understanding of the differences between land loan and home loan helps in making informed financial decisions. The blog will delve into understanding both home loan and land loan, key differences between the two, and related aspects such as loan tenure, eligibility, interest rates, tax benefit, and loan amount.

What is Home Loan?

A home loan is basically a secured loan which is offered by the financial institutions for supporting individuals in realizing their dream of home ownership or purchasing a residential property. Such properties comprise of individual houses, flats, villas, or apartments. Such loans are designed to cover the cost of these residential properties, also additional expenses in relation with home improvement or home construction projects.

Features of Home Loans

Aim: People opt for home loans who have an intention to purchase a residential properties like ready-to-move-in houses and under construction properties.
Loan Tenure: In general, the tenure of home loans ranges from 15 to 30 years as it offers adequate time to the borrower to repay the loan amount and manage their finances efficiently.
Loan Amount: It is the amount offered by the lenders to the borrowers in order to cover a significant portion of the cost of purchasing the property. It usually ranges from 60% to 90% of the purchase price and the remaining amount is paid by the borrower himself in the form of down payment.
Loan Eligibility: Home loan eligibility is in general based on certain aspects like existing financial obligations, fixed monthly income, employment status, and most importantly the credit score. On the basis of all these factors, financial institutions assess and analyse the repayment capacity of the loan applicants and therefore approve or disapprove the home loan application of the borrowers.
Tax Benefits: One of the major feature of home loans is the loan applicants can avail the tax benefit on home loans. As per the Section 24 and Section 80C of the Income Tax Act of India, one can avail tax benefits. These benefits are primarily on the interest paid and the repayment of the principal amount.
Interest Rates on Home Loans: Home loan interest rates can be either fixed or floating. The floating home loan interest rates are the one that keeps on changing as per the market conditions. On the other hand, the fixed home loan interest rates are the one that remain constant during the entire home loan tenure.

What is a Land Loan?

A land loan, also known as a plot loan, is a loan taken to purchase a plot of land. The purpose of buying the land can vary from building a house in the future to investment or agricultural use. However, most financial institutions offer land loans primarily for the purchase of residential plots.

Key Features of Land Loans

Aim: Land loans are specifically meant for purchasing a plot of land, which can be used for constructing a residential property in the future. Some lenders may restrict the loan to plots within municipal or city limits.
Loan Tenure: The repayment tenure for land loans is usually shorter than that of home loans, ranging from 5 to 15 years. This shorter tenure reflects the higher risk associated with land loans.
Loan Amount: The loan amount for land loans is typically lower compared to home loans. Financial institutions generally offer up to 60-75% of the plot's value as a loan, requiring the borrower to fund the remaining amount.
Loan Eligibility: Eligibility criteria for land loans are similar to those for home loans, including income, credit score, employment status, and existing liabilities. However, lenders may have stricter criteria due to the higher risk involved.
Interest Rates on Home Loans: Interest rates on land loans are generally higher than those on home loans due to the increased risk. Additionally, these rates can be either fixed or floating.
Tax Benefits: Unlike home loans, land loans do not offer any tax benefits. Tax deductions under Sections 80C and 24 are not applicable unless the plot is used for constructing a residential property and a home loan is taken subsequently for construction purposes.

Differences b/w Home Loans and Land Loans

Aspect	Home Loan	Land Loan
Purpose	Used for purchasing or constructing residential properties.	Used for purchasing a plot of land, typically for future residential construction.
Loan Amount	Covers up to 60-90% of the property's value.	Covers up to 60-75% of the plot's value.
Tenure	Longer tenure of 15-30 years.	Shorter tenure of 5-15 years.
Interest Rates	Generally competitive interest rates.	Higher interest rates due to increased risk.
Tax Benefits	Tax deductions on principal and interest payments.	No tax benefits unless a home is constructed on the plot.

Considerations for Choosing Between Home Loan and Land Loan

When deciding between a home loan and a land loan, it's essential to consider your immediate and future plans, financial situation, and long-term goals. Here are some key factors to keep in mind:

Immediate Need: If you need a ready-to-move-in home or plan to construct a house immediately, a home loan is the better option. It offers higher loan amounts and longer tenures, making it easier to manage finances.
Future Plans: If you're looking to invest in a plot of land with the intention of building a house in the future, a land loan might be more suitable. However, be prepared for shorter repayment tenures and higher interest rates.
Financial Stability: Assess your financial stability and repayment capacity before opting for either loan. Home loans offer tax benefits that can ease the financial burden, while land loans do not.
Risk Tolerance: Land loans come with higher risks due to the possibility of land appreciation and regulatory issues. If you're risk-averse, a home loan might be a safer choice.

Conclusion

Understanding the differences between home loans and land loans is crucial for making an informed decision that aligns with your financial goals and property plans. While home loans offer the advantage of higher loan amounts, longer tenures, and tax benefits, land loans provide an opportunity to invest in a plot of land for future construction. Carefully evaluate your needs, financial situation, and long-term objectives to choose the right type of loan for your property purchase.

By comprehensively comparing home loans and land loans, you can ensure that you make a well-informed decision that best suits your needs and financial situation. Whether you're looking to buy your dream home or invest in a plot of land for future development, understanding these key differences will help you navigate the process with confidence.