Plot Loan: Loan on Plot Purchase and Home Construction

A plot is a good investment that grows in value over the long term. Hence, it gives better returns at the resale. Historically Indians are purchasing lands or plots for various purposes predominantly as an investment. A Land loan or plot loan is a loan provided by banks to borrowers for the acquisition of a plot of land. The bank establishes a definite period for loan repayment, which you accomplish through equal monthly installments (EMIs).

You can use it to purchase land so you’ll build upon it in the future. While home loans can have tenures of up to 30 years, plot loans extend only up to fifteen years. One of the restrictions on plot loans in India is that they can’t be used to purchase agricultural land. Apart from that, it’s fairly easy to apply and acquire approval for a plot loan. Normally, it takes no longer than a week for your application to be approved. You should be a minimum of 18 years old and less than 70 years old.

Features of Plot Loan:

1. Land Loan Interest Rates: The rate of interest in case of a loan to purchase land and home loans are similar. However, some banks offer a couple of basis points higher rates for loans for land purchase than of home loans. Banks provide a stipulated time for construction over the plot. Therefore, the bank mandates that borrowers provide a construction certificate. If the borrower doesn’t make construction over the plot within the amount from the date of the first disbursement, land loan interest rates structure for the borrower changes from a home loan to a loan against property.
2. Loan to Value Ratio: Loan to value or LTV means the quantity of loan which a borrower will get against his property. LTV, in case of loan for land purchase with construction, is significantly lower. Furthermore, the loan-to-value ratio (LTV) will be capped at a maximum of 70% of the land value.  In the case of home loans, LTV ranges between 75% to 90%.
3. Lower Tenure: Land loans have relatively a shorter tenure of up to fifteen years, which isn’t the case in home loans, which is accompanied by an extended tenure of 30 years. Therefore, the EMI within the case of a loan for plot purchase is above that of normal home loans. The tenure for a land loan also depends on the age of the borrower, repayment capacity, etc.
4. Tax Benefits: Home loans qualify for a tax deduction on payment of the principal amount under Section 80C of the income tax Act also as the interest component under Section 24(b) of the income tax Act. On the other hand, tax benefits toward land loans aren’t available. However, borrowers could claim a tax deduction on loan if the home is constructed on a plot purchased by the borrower. A borrower can claim a tax deduction against the loan amount taken for construction, after the completion of construction on the plot.
5. Prepayment Penalty: Floating rate loans sanctioned to individual borrowers are free from the prepayment penalty if a borrower wants to foreclose the loan. However, a land loan sort of a home loan could attract prepayment charges of two to 4% of the prepaid amount if the non-individual borrower has taken it. A borrower should read the loan agreement carefully and clarify the foreclosure charges of the loan before signing the agreement.

Difference Between Plot Loan & Plot + Construction Loan:

1. Plot Loan: A loan for plot purchase can only be availed for the acquisition of a vacant residential plot or a piece of land which may be later used to construct a house or for investment purpose. The property should be located within the municipal or corporate limits. This kind of loan may be a high-risk loan, and there aren’t any tax benefits. The interest rate varies for each bank; however, it primarily depends on factors like employment type, the amount of loan for plot purchase, and therefore the variant of the loan. Certain banks offer attractive rates of interest if the borrower is woman.
2. Plot + Construction Loan: This loan is availed to get a residential plot and construct a house on the property within the stipulated time. If a borrower doesn’t commence construction within the required period, then the bank can increase the rate of interest on the loan.

Difference Between Plot Loan and Home Loan:

• Plot loans are available only for a residential plot, unlike home loans that are available on all properties.
• The maximum Loan to Value (LTV) when it involves plot loans is stipulated at 70 percent. For home loans, the LTV can go up to 90 percent in some cases.
• Non-Resident Indians (NRIs) aren’t offered these loans by most banks operating within the country
• Compared to home loans, the repayment tenure for land loans is lower.

What are the charges for a plot loan?

There are two different types of expenses involved before and after a plot loan is approved.

The first is the pre-sanction charge, which incorporates the fees for an inquiry of the property and verification of legal ownership of the property. Then there are the valuer’s fees, which determines the property value and therefore the amount of loan you’re eligible for.

After that, there are post-sanction charges like stamp duty and property insurance alongside applicable registration fees and taxes.

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