How Is A Home Loan Different From A Plot Loan?
There are not much differences between a home loan and a plot loan except the fact that home loans are used for buying a developed property or under-construction property while a plot loan is used for buying a piece of land which can be developed later for residential purposes. Banks offer plot loans at higher interest rates only when the applicants fulfils the eligibility. Also, plot loans do not offer tax benefits like home loan.
MakaaniQ tells you how plot loans and home loans differ.
What are Plot Loans
Banks and financial institutions give plot loans to both salaried and self-employed individuals who have good credit scores and a clean credit history and repayment track. People take land or plot loans to buy land as a future investment or to construct a home on it in future.
There are different kinds of plot loans that would help you purchase a vacant land:
- You can purchase a plot on direct allotment in a developer project or a housing society
- You can purchase a plot on resale in a development authority project or a housing society
- The plot of land identified must be either within the city limits or outside city limits but the layout of the plot should be:
- Strictly for residential purposes
- Approved by a competent authority
The amount of plot loan is funded based on these two components of the project cost:
- Cost of the land (i.e. the price in the sale deed)
- Development cost charged by the developer towards preparation of layout, and to provide common amenities
The security (or collateral) for plot loans is created by an equitable mortgage (i.e. transfer of ownership/ title deeds by the borrower to the lender).
Points to remember for credit appraisal of 'plot loans'
- The margin money (i.e. borrower's contribution to the loan amount) ranges from 30 to 50 per cent for plot loans
- Most of the lenders fund up to 70 per cent of the cost of the land/plot (i.e. Loan-to-Value ratio)
- Fixed-Obligation-to-Income ratio is given up to 60 per cent based on the Net Adjusted Income of the applicant
- Plot loans are considered riskier. So, interest rates for plot loans are a few basis points higher than home loan interest rates. Usually interest rates for plot loan varies between 8-12 per cent. Few banks offer lower interest rates for women borrowers.
- Plot loans are mostly given for a tenure period of 15-20 years or even lesser. Usually, the tenure for land loans is less due to their riskier nature.
- Borrowers are not eligible for tax benefits for repayments made towards a plot loan
- However, if construction has started on the purchased plot, the borrower qualifies for tax benefits
- The plot loan amount varies according to the locality and various other factors
The procedure and key requirements such as documentation, eligibility criterion, equated monthly instalment (EMI) payment options, rules for co-applicants, appraisal processes etc. remain almost the same for home loans and plot loans.
Quick look at the differences