How Is Home Loan Different From Plot Loan?
Home loans and plot loans serve similar purposes. You take a home loan or a plot loan to buy a property as an investment or to develop it. But do not confuse a plot loan with a home loan. There are some underlying differences between both when it comes to tax implications, qualifications, eligibility and other parameters.
Home loans are taken for buying properties that have already been constructed or are under construction. Home loans are also taken for buying properties that will be developed or improved in the near future. But if you plan to develop a property on a piece of land with the motive of purchasing the property, then “plot loan” is the answer.
MakaaniQ tells you how plot loans and home loans differ.
Understanding 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 plot loans either 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
- Plot loans are mostly given for a tenure period of 15-20 years
- 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