When it comes to real estate financing, prospective buyers should compare a home loan to a land loan. A home loan basically describes how you would get a fund to secure your home as it is designed to buy an already fully constructed property.
However, a land loan is more specific since it only aims to acquire land, which would later be developed to become a residential or commercial property. This blog post will help buyers make informed decisions while understanding the difference between both kinds of loans.
What is a Home Loan?
Home loans are a form of home finance offered by banks or financial institutions to enable buyers to invest in properties. Traditionally, the amounts borrowed represent large proportions of the value of the property being purchased, thus enabling the buyer to spread the cost of the property over many years through monthly payments.
Typical Uses of Home Loans
- Buying a New House: These are the most commonly used home loans to buy newly constructed houses.
- Buying Resale Houses: Loans allow homebuyers to purchase houses that belong to existing houseowners.
- Refinance: A homeowner’s outstanding home loan is refinanced at the present market rate to obtain reduced interest rates or any other variation in the loan terms.
- Improving or Repositioning a House: Some types of home loans offer funds to the buyer to improve or reposition a house.
What is a Land Loan?
A land loan is a specialised type of financing designed specifically for the acquisition of land. Its main significance is for buyers who might wish to put up a home in the future or invest in a piece of property without an immediate plan to commence construction. Such a loan will enable the purchase of undeveloped land or plots for future development.
Typical Uses of Land Loans
- Purchasing Agricultural Land: The borrowers often use land loans for farming or agriculture.
- Buying Recreational Land: For recreation purposes, a lot of people buy land for camping or fishing.
- Investment Scope: Some investors prefer to buy land using a land loan in the hope that it will increase in value later.
What are the Key Differences Between Home Loans and Land Loans?
Here are the major differences between housing loans and land loans:
| Aspects | Home Loans | Land Loans |
| Purpose of the Loan | Designed for purchasing existing homes or newly constructed properties. | Intended to buy vacant land for future development or investment. |
| Loan-to-Value (LTV) Ratio | Typically, higher LTV ratios, often up to 80-90%, depending on the lender and property type. | Generally, lower LTV ratios, usually around 70-80%, reflect higher risk. |
| Interest Rates | Generally, lower interest rates are due to lower risk associated with developed properties. | Higher interest rates as land loans carry more risk and uncertainty. |
| Loan Tenure | Longer repayment periods, commonly ranging from 15 to 30 years. | Shorter loan terms, typically between 5 to 15 years. |
| Eligibility Criteria | Requires proof of income, credit history, and the value of the purchased property. | With more stringent requirements, lenders may consider factors like land location, potential for development, and buyer’s creditworthiness. |
| Documentation Required | Standard documents include identity proof, income proof, property documents, and loan application forms. | Additional documentation, such as land title deeds, zoning permits, and plans for future construction or development, may be required. |
Tax Benefits
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Tax Deductions for Home Loans
Several tax benefits are available on home loans in India under Sections 80C and 24(b) of the Income Tax Act. Under Section 80C, you can deduct the principal amount paid up to ₹1.5 Lakhs, while under Section 24(b), interest payments can be claimed up to ₹2 Lakhs as a deduction.
For example, consider a house owner paying ₹1 Lakhs as principal and ₹1.5 Lakhs as interest in advance every year; he or she saves ₹1 Lakh and ₹1.5 Lakhs, respectively, to his taxable income. In addition, stamp duty and registration charges paid are allowed under section 80C, making home buying more beneficial.
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Tax Benefits for Land Loans
Land loans in India usually offer fewer tax benefits than house loans. Though the interest paid on a land loan is deductible, if the land is for construction or investment purposes, no money is deducted for property taxes until a structure is built.
For example, if a borrower pays ₹1 Lakhs as interest on a land loan, he/she can offset it with his taxable income if he/she plans to construct a house. Unlike home loans, where multiple provisions come into the picture, tax benefits on land loans are otherwise quite limited and merely depend on future development plans.
Read Also: TDS on Sale of Property by NRI in 2024
Which Loan is Better for Your Needs?
Consider your investment goals and some other important factors while deciding which loan is better for you.
Evaluating Your Investment Goals
When considering home loan vs. land loan options, you should align your investment objectives:
- Immediate Needs vs. Long-term Needs: If you have an urgent need for a place to stay, you can opt for a home loan. If, on the other hand, you don’t have a rush to build yet, the land loan should better fit your needs.
- Investment Strategy: You decide whether you want income from rentals or buy land and wait for an increase in returns in the long term. Knowing your investment strategy will dictate your decisions.
- Personal Requirements: Here, your lifestyle needs come into play. If you want to settle into a ready-made home, a home loan is the way to go. A land loan is viable if you are willing to wait for construction.
Factors to Consider When Choosing Between Home and Land Loans
- Interest Rates: Home loans are readily available with low interest rates when compared to land loans. This is because buying a developed property is more risk-free in nature.
- Down Payment: You might have to make a higher down payment for the loan sanctioned on the land. This can impact your cash flow and budget at present.
- Loan Terms: With most home loans, you qualify for terms of 15 to 30 years; land loans will be from 5 to 15 years.
Additional Considerations
Here are some important risk factors to consider while deciding between a home loan and a land loan.
Risk Factors Associated with Home Loan
- Market Fluctuation: Market variations can result in shifts in real estate values. Property values tend to appreciate when the market is on the rise, which can benefit those borrowing residential properties.
- Interest Rate: In an adjustable-rate mortgage, the interest rate may go up after a fixed period, raising the monthly payment. Sometimes, this can become unbearable for your budget and hard to handle.
- Maintenance and Repair Bills: Owning the house also includes home maintenance. Repair costs of leaky pipes or damaged roofs can be expensive and as hazardous as other circumstances that take people away from their financial savings.
Risk Factors Associated with Land Loan
- Appreciation Value: Land does not appreciate like homes. If it does not appreciate in value as hoped, the probability of loss arises.
- Zoning and Development Restrictions: The land could have zoning regulations that prevent it from being used in a specific way. If the envisioned development is not allowed, this can even prevent the owner from building or using the property effectively, which can affect value.
- Financing Challenges: Any loan taken for land is relatively more stringent compared to the norms of a home loan, often requiring higher down payments and, in some cases, shorter loan tenures.
Read Also: Can a Foreigner Buy Property in India? – Essential Guide
The most significant decision to be made is whether to opt for a home or a land loan based on your investment goals, your financial situation, and the differentiated nature of the two types of loans. Understanding the requirements increases your chances of making a better decision regarding finance and the financial prospects following it.
So, if you are looking to find a beautiful home in an elite location, go ahead and visit Rustomjee residential properties. Your ideal living space is waiting there.
FAQs
- Can I use a home loan to buy land?
Yes, home loans can be used to buy land. However, if you want to buy land and build a house on it, lenders will require you to start construction within a certain period.
- What are the main differences between home loans and land loans?
Home loans are more geared toward buying existing properties, and they usually carry lower rates and longer terms. In comparison, land loans are geared toward buying undeveloped land and tend to carry higher rates and shorter terms, increasing the financial risk.
- Are there tax benefits for land loans similar to home loans?
Land loans have relatively fewer tax benefits than home loans. Although interest on a land loan may be deductible, property tax deductions are not available until a structure is built on the land.
- What is the typical interest rate for land loans compared to home loans?
Land loans have a higher interest rate than home loans, which can be between 8% and 10%. The latter normally falls between 5% and 7.50%, depending on market conditions and lender norms.
- Can a land loan be converted into a home loan later?
Yes, the existing land loan can often be easily converted into a home loan once construction begins, though normally, it is just a refinancing of the same loan under new terms.
