Know the Difference Between: Plot Loan V/S Home Loan

A Plot Loan is a loan option specifically for buying residential plots or land. The only difference from a typical mortgage is the purpose for which the funds are meant to be used. In addition, one can obtain a normal mortgage to finance the building of a home on that piece of land.

The majority of Indians dream of owning a house. Purchasing a home typically involves a substantial investment that often necessitates financial support in the form of a Home Loan obtained from financial entities like Banks and Housing Finance Companies (HFC). For individuals residing in metropolitan cities and urban locations, it is typically a pre-built apartment building or standalone house constructed by a developer.

Furthermore, individuals can also access a mortgage to build a home according to their preferences on a specific piece of property. Furthermore, certain lenders provide a combination loan for buying a plot of land and financing the building of a house on that same plot.

What is a Plot Loan

Plot Loan is a housing loan provided by financial institutions (also known as 'lenders') for buying a plot or land with the purpose of building a house, as the name implies.

These plots are available for purchase from individuals, private developers, or can be acquired through direct allocation from various government authorities like DDA, CIDCO, JDA, MHADA, and BDA.

It is like a standard mortgage, but specifically designed for purchasing a residential plot or land instead of purchasing a pre-built home. Lenders provide this loan only after thoroughly evaluating the applicant's qualifications and the property, just like with a home loan.

Eligibility for a Plot Loan and Home Loan

Just like with home loans, getting approved for a plot loan depends on two key factors: your ability to repay the loan and the suitability of the land itself.

For You: It's About Repayment

• Earning Power & Stability: Lenders will assess your income and employment history to see if you can comfortably make the monthly payments.
• Credit Score: A good credit score shows responsible borrowing habits and increases your chances of approval.
• Other Debts: Existing loans and debts affect your overall repayment capacity.

For the Plot: It's About the Land

• Legal Status: The bank will ensure the land has clear ownership and no legal disputes.
• Pricing & Location: Fair market value and a desirable location make the plot a good investment for the bank's money.
• Seller Reputation: A reputable seller with proper documentation adds credibility to the transaction.
• Property Type: Some lenders might have restrictions on the type of plot (residential, commercial, etc.).

By considering both your financial health and the plot's characteristics, lenders minimize risk and ensure a smooth loan process for everyone involved.

While both plot loans and home loans help you finance property, they cater to different needs. Here's a quick guide to understand which one suits you best:

Location and Purpose:

• Home Loan: Meant for purchasing a ready-to-move-in, under-construction, or self-constructed residential property.
• Plot Loan: Exclusively for buying land, typically for residential purposes.

Loan Tenure:

• Home Loan: Offers a longer repayment period, typically up to 30 years, allowing for manageable EMIs.
• Plot Loan: Comes with a shorter tenure, usually maxing out at 15 years, due to the lower loan amount compared to home loans.

Tax Benefits:

• Home Loan: The Indian government offers tax deductions on the interest repaid and principal amount on a home loan, making it an attractive option for tax-savers.
• Plot Loan: No tax benefits are available on plot loans.

In Summary:

Home loans are ideal for purchasing a complete residential property, offering a longer repayment window and tax advantages. Plot loans, on the other hand, are suitable for those who want to buy land and build their home later, with a shorter loan term and no tax benefits.

Also Read: Home Loan Benefits for Women in India

Difference in LTV of Home Loan and Plot Loan

The majority of lenders offer financing ranging from 70% to 80% of the plot's cost as stated in the sale agreement, or its market value determined by the lender, whichever is less. This is commonly referred to as the Loan-To-Value (LTV) Ratio. However, for standard home loans, most banks typically set the LTV ratio between 75% and 90%.

Many lenders conduct an independent assessment of the plot's market value through a third-party evaluator, a practice seldom seen with regular home loans.

Additionally, certain lenders may either refrain from providing land loans altogether or offer reduced amounts for plots situated beyond city limits.

For further details on how property eligibility is assessed for home or plot loans, please refer to the provided link.

Interest Rates for a Plot Loan V/S Home Loan

Typically, lenders apply a higher interest rate for plot loans in comparison to home loans.

Here are the minimum interest rates set by several prominent lenders in India for their Plot Loans and Home Loans, as of January 2024:

Tenure of a Plot Loan V/S Housing Loan:

Both Home Loans and Plot Loans come with a maximum repayment tenure of 30 years, subject to the policies of individual banks.

For example, SBI extends a maximum tenure of 10 years for plot loans, while HDFC and LIC Home Finance Limited (LICHFL) offer plot loans with a maximum tenure of 15 years. Additionally, lenders like ICICI Home Finance and DHFL provide plot loans with a repayment period of up to 20 years. Public sector banks such as Union Bank of India and PNB Housing Finance (PNBHFL) allow a maximum tenure of 30 years for plot loans.

Furthermore, LIC Housing Finance offers a composite loan for purchasing a plot and constructing a house on it, with a maximum tenure of 30 years.

Similar to home loans, the tenure of a plot loan is typically limited by either the borrower's retirement age or the maximum tenure specified by the lender, whichever comes earlier.

Also Read: Applying for a home loan - Online vs Offline: Which One Is Better?

Tax Benefits on a Plot/ Land Loan V/S a Home Loan

Unlike a Home Loan, there are no tax benefits applicable on a Plot Loan.

Nevertheless, tax benefits on a home loan acquired for the construction of a house on that plot are available under various sections of the Income Tax Act:

Interest: Up to a maximum of Rs. 3.5 lakhs can be claimed for deduction against the interest paid on a home loan, as outlined below:

1. Section 24B: A maximum deduction of Rs. 2 lakhs in one financial year.
2. Section 80EE: Deduction allowed up to Rs. 50,000 in one financial year if the loan is sanctioned between April 1, 2016, and March 31, 2017.
3. Section 80EEA: Maximum deduction of Rs. 1.5 lakhs in one financial year for home loans sanctioned between April 1, 2019, and March 31, 2022.
An applicant can claim a deduction against the loan interest paid under Section 24B, and either Section 80EE or Section 80EEA. However, a deduction cannot be claimed under both 80EE and 80EEA.

Principal: The principal amount repaid can be claimed for deduction under Section 80C of the Income Tax Act. Nonetheless, the deduction limit of 80C stands at Rs. 1.5 lakhs.

Some key points to consider while taking a Plot Loan

1. Plot or Land Loans are exclusively offered for residential lands earmarked for house construction and are not applicable for commercial or agricultural use.

2. Commencement of house construction on the plot obtained through a Plot or Land Loan is required within 3-5 years from the initial disbursement of the loan. This timeframe may differ among various banks.

3. Lenders typically levy a processing fee equivalent to approximately 1-2% of the applied loan amount.

Also Read: Consequences of Home Loan Default | Challenges with Home Loan Repayment.