The procedure for taking Home loans and plot loans is the same. There is no difference in eligibility, EMI options, and loan processing formalities. That said, they are two different loans used for two different purposes.
A loan against property (LAP) may belong to either category – a home loan or a loan against the land. The former is to buy land to use and to construct your new home. The latter is a multipurpose loan.
Difference Between Home Loan & Plot Loan
The difference between the two is important to choose between the two.
Location of the Land and Purpose of the Loan
A home loan is for the construction of a new home or to buy a home. You can use 60% of the loan amount to buy the plot. But 40% of the loan amount is set aside for house construction. You can use the loan amount to buy land wherever you want.
You can buy a bungalow, an apartment, or a house of any kind from an approved builder or homeowners as per the lender’s policy.
Banks and other lenders grant plot loans to the borrower to buy vacant land by allocation or resale. The land need not be only to construct a new home. You can leave it as an open space or put up a building. The land should be within municipality or corporation limits and should not be in an industrial area.
Tenure of the Loan
The borrower can opt for a home loan duration of up to 30 years. In comparison, a plot loan is for a shorter period —15 years.
The loan to value ratio (LTV) and the loan to cost ratio (LCR) determines the extent of the loan against the cost or value of the property. The lenders, at their discretion, sanction a home loan of about 75-90% of the LTV.
For a plot loan, you must pay a down payment of 20% of the cost. It is because the loan will not exceed 75-80% of the LTV. Generally, it covers 70% of the property cost.
Income Tax Benefits
On a home loan, you can claim a tax deduction on the repayment of the principal amount and interest. If it is a joint home loan, both parties can claim the benefits.
But for a land loan, you can only claim tax exemptions for the loan taken for construction. A plot loan is not eligible for any other tax benefits.
LAP Loan Interest Rate
LAP loan Interest rates are much lower for home loans and higher for loans against property. Salaried employees pay 9-10.5%; And self-employed pay 9.35-11.15% as interest.
But for loans against property, lenders charge salaried employees 10.10% – 11.50 % and 10.50 – 14.50% for self-employed individuals.
Home loans are not flexible as they don’t have the top-up feature. Lenders allow borrowers to avail themselves of top-up loans against property.
What you do with the property should decide whether you take a loan against land or a home loan. Yes, you can secure a plot loan to overcome your financial problems. But if you plan to build on it, you will be left with nothing to offer as collateral. That’s when a home loan becomes a better option.