Did you know a land loan can be more expensive than a Home Loan? There are other terms and conditions too. Read on to find out.
Ramesh, a textile trader from Panipat had to drive more than 40 kilometers every day from his home to his office. Not only was his daily commute burning a hole in his pocket, it was also making him unproductive at work.
He toyed with the idea of buying a small plot of land near his office so he could build a second home. He approached his bank for a land loan even though he had a Home Loan running, to purchase a plot of land near his office. However, to his utter surprise, his application was rejected as the plot came under an industrial area outside municipal limits.
To add to this, his Credit Score was not in great shape. Ramesh had more questions than answers after his land loan application was rejected by the bank.
Additional Reading: 5 Ways To Improve Your Credit Score
Here are the six questions you might want answers for if you need a land loan.
Who can get a land loan?
Land loans are offered by banks and Non-Banking Financial Companies (NBFC) to all Indian residents over the age of 21 years. Some banks also offer land loans to Non-Residents Indians (NRI) if the land is being bought to construct a house.
For Indian residents, land loans are available to both salaried as well as self-employed individuals with a good Credit Score. The only catch when applying for a land loan is to make sure that the plot of land that you want to purchase is a residential plot and not an agricultural or commercial land.
The land also needs to be within corporation/municipality limits. For resident Indians, land loans are available for constructing a residential home on the plot or for purchasing a plot alone.
What’s the maximum possible loan amount?
Unlike traditional Home Loans where loans are available for 90% of the value of under construction or fully constructed property, land loans offer only a maximum of up to 70% of the cost of the plot in urban centers.
If it is smaller cities or towns, the maximum Loan To Value (LTV) ratio for land loans is usually fixed at about 50%-60% of the total cost of the plot. This means that if you are want to buy a plot of land using a land loan, you would have to shell out anywhere between 30% and 50% of the cost as down-payment.
Additional Reading: Applying For A Home Loan? Keep These 5 Tricks In Mind To Avoid Rejection
Will I be eligible for tax deductions for a land loan?
Even though a land loan is offered for construction of a house, you are not eligible for income tax deduction for payments made towards the repayment of a land loan. However, if you start construction activity on the purchased plot, then you become eligible for tax benefits for that part of the loan.
So, the part of the loan that is used for the construction of a house can be used for tax deduction. The deduction is applicable only from the year in which the construction activity is completed.
What are the documents I need to submit?
Depending on your eligibility, you would need to submit your identity and address proof details to the bank along with your income proof and bank statements. Salaried individuals need to submit their salary slip as proof of income along with copies of last 6 months bank statement showing salary credits.
You will also need to furnish land ownership documents, sale agreement and other related documents to the concerned bank or NBFC. This might include a ‘no encumbrance’ certificate, possession certificate, no objection certificate from the municipality and other documents.
Additional Reading: Fixed Or Floating Rate: Which Is Ideal For Your Home Loan Now?
What will the interest rate be?
Land loans come at a higher interest rate when compared to Home Loans. However, if you are going to construct a house on that land, you can get your loan at Home Loan rates.
Note that most lenders place conditions stating that you need to start constructing a house within 2-3 years of taking the loan. If you don’t, you will have to pay higher rates. Typically, for constructing a house on a plot of land, a Home Loan is offered. But, if construction is not done, it will become a land loan (which will come at a higher interest rate). So, read the terms and conditions of your loan carefully.
Can I get a joint land loan?
Just like Home Loans, you can have co-applicants for a land loan. The same rules with regards to co-applicants for a Home Loan will apply to land loans. Usually, only spouses and blood relatives are allowed to be co-applicants.
Additional Reading: Tax Saving Tips When Clubbing Income for A Joint Home Loan
Home Loans Versus Land Loans:
|Criteria||Land Loans||Home Loans|
|Eligibility||Resident Indians and NRIs with preconditions||Resident Indians and NRIs|
|Tax Deductions||Available only if you construct a house on the land.||Available|
|Tenure||10-15 Years||Up to 30 Years|
|LTV||Maximum limit of up to 50% to 70% of the cost of plot.||Up to 90% of cost of land and construction|
The legal verification of documents for land loans is more stringent than Home Loans. So, it is better to get legal help when going in for a land loan. Note that Home Loans give you maximum tax benefits as supposed to land loans. Loan rates differ from one lender to another. Be sure to compare rates and terms.