When it comes to purchasing real estate, the financing options available can often seem complex. Two common types of loans are plot loans and home loans, each serving a specific purpose and catering to different needs. This blog aims to explain the differences between a plot loan and a home loan, discussing their features, commonalities, and differences to help you make an informed decision. We will also delve into various aspects of these loans to give you a comprehensive understanding of “plot loan vs home loan.”
What is a Home Loan?
A home loan, also known as a housing loan, is a sum of money borrowed from a financial institution or bank to purchase a residential property. This could be an apartment, a house, or any other residential dwelling. The borrower repays the loan amount along with interest over a specified period, usually ranging from 10 to 30 years. Home loans are designed to help individuals and families acquire a place to live by providing the necessary funds upfront.
Key Features of Home Loans:
Purpose: Specifically for purchasing or constructing residential properties.
Loan Amount: Typically covers up to 80-90% of the property’s market value.
Repayment Period: Long tenure, generally ranging from 10 to 30 years.
Interest Rates: These can be fixed or floating, with floating rates being more common.
Tax Benefits: Borrowers can avail of tax benefits on both the principal repayment and the interest paid under Section 80C and Section 24 of the Income Tax Act.
What is a Plot Loan?
A plot loan, also known as a land loan or land purchase loan, is a financial product specifically designed for the purchase of a plot of land. The land purchased can be for residential or investment purposes, but the primary intent must be disclosed to the lender. Unlike home loans, plot loans are granted for the acquisition of land where the borrower may plan to build a home in the future.
Key Features of Plot Loans:
Purpose: For purchasing residential plots of land.
Loan Amount: Generally covers up to 70-80% of the land’s market value.
Repayment Period: Slightly shorter tenure compared to home loans, usually up to 15 years.
Interest Rates: Typically higher than home loans due to the perceived risk.
Tax Benefits: Limited tax benefits compared to home loans. Tax benefits are only available if the borrower constructs a house on the plot within a specified period, usually three years.
Commonalities Between Home Loans and Plot Loans
Despite serving different purposes, home loans and plot loans share some similarities:
Secured Loans: Both home loans and plot loans are secured loans, meaning the property or land itself acts as collateral for the loan. This reduces the risk for lenders and typically results in lower interest rates compared to unsecured loans.
Eligibility Criteria: The eligibility criteria for both loans are quite similar. Lenders assess the borrower’s credit score, income stability, age, employment history, and existing liabilities before sanctioning the loan.
Documentation: The documentation process is largely similar, requiring proof of identity, proof of address, proof of income, bank statements, property documents, and, in some cases, an agreement to sell or sell deed.
Down Payment: Both types of loans require a down payment from the borrower. For home loans, this is typically 10-20% of the property’s value, while for plot loans, it is usually around 20-30% of the land’s value.
Loan Processing Fee: Both home and plot loans involve a processing fee, which is a percentage of the loan amount. This fee covers the administrative costs of processing the loan application.
Differences Between Home Loans and Plot Loans
While home loans and plot loans have some commonalities, they differ significantly in various aspects. Understanding these differences is crucial when deciding between a plot loan and a home loan.
- Purpose of the Loan:
Home Loan: A home loan is intended for the purchase or construction of a residential property. It can also be used for home improvement or home extension purposes.
Plot Loan: A plot loan is specifically for purchasing a plot of land. The land must be used for residential purposes, and the borrower must disclose any future construction plans to the lender.
- Loan-to-Value Ratio (LTV):
Home Loan: The LTV ratio for home loans is higher, typically around 80-90% of the property’s market value. This means borrowers can get a higher loan amount relative to the property price.
Plot Loan: The LTV ratio for plot loans is lower, usually around 70-80% of the land’s market value. Borrowers need to fund a larger portion of the purchase price themselves.
- Tenure:
Home Loan: Home loans generally have longer tenures, ranging from 10 to 30 years. This allows for lower monthly EMIs, making repayment more manageable over an extended period.
Plot Loan: Plot loans typically have shorter tenures, usually up to 15 years. This results in higher monthly EMIs compared to home loans.
- Interest Rates:
Home Loan: Home loans usually come with lower interest rates compared to plot loans. This is because residential properties are seen as less risky investments for lenders.
Plot Loan: Plot loans generally have higher interest rates due to the increased risk associated with land purchases. Lenders consider land as a more speculative investment.
- Tax Benefits:
Home Loan: Borrowers can avail of tax benefits on both the principal repayment (under Section 80C) and the interest paid (under Section 24) on home loans. This can result in substantial tax savings.
Plot Loan: Tax benefits on plot loans are limited. Borrowers can only claim tax deductions if they construct a house on the plot within a specified period, typically three years. The benefits apply to the interest paid on the loan but not the principal repayment.
- Usage Restrictions:
Home Loan: Home loans can be used for various purposes, including buying a ready-to-move-in property, constructing a new home, or renovating/expanding an existing home.
Plot Loan: Plot loans are strictly for purchasing residential plots. The land must be located within municipal or corporation limits. The agricultural land, plantations, or land outside the city limits are usually not eligible. Financial institutions generally exclude agricultural land from plot loans because these lands are intended for agricultural productivity rather than residential development.
- Availability:
Home Loan: Home loans are widely available and offered by most banks and financial institutions due to their lower risk and high demand.
Plot Loan: Plot loans are less commonly offered and may have stricter eligibility criteria. Some banks and lenders may have specific conditions or limitations on plot loans.
Choosing Between a Plot Loan and a Home Loan
Deciding between a plot loan and a home loan depends on your specific needs, financial situation, and future plans. Here are some scenarios to help you determine which option might be best for you:
When to Opt for a Home Loan:
Immediate Home Purchase: If you are looking to buy a ready-to-move-in house or apartment, a home loan is the ideal choice. It provides the necessary funds to purchase the property and allows you to start living in your new home right away.
Construction Plans: If you already own a plot of land and plan to start construction immediately, a home construction loan (a type of home loan) can fund the building process.
Renovation or Expansion: If you need funds to renovate or expand your existing home, a home improvement loan (another type of home loan) can help cover the costs.
When to Opt for a Plot Loan:
Future Construction Plans: If you want to purchase a plot of land to build a house in the future, a plot loan is suitable. It allows you to secure the land now and plan the construction later.
Investment Purposes: If you view land as a long-term investment and prefer to wait for property appreciation before deciding on construction, a plot loan can provide the necessary financing.
Customisation and Flexibility: If you prefer the flexibility to design and build your home according to your specifications and at your own pace, a plot loan offers the freedom to do so.
Conclusion
Understanding the differences between a plot loan and a home loan is crucial for making an informed decision when purchasing real estate. Both types of loans serve specific purposes and cater to different needs, with unique features, benefits, and limitations.
In summary, home loans are ideal for those looking to buy or construct a residential property immediately, offering higher loan amounts, longer tenures, and substantial tax benefits. On the other hand, plot loans are suited for individuals planning to purchase land for future residential construction or investment purposes, offering flexibility and customisation options.
By carefully considering your financial situation, future plans, and the specific features of each loan type, you can choose the best financing option that aligns with your goals. Whether you decide on a plot loan or a home loan, both options can help you achieve your dream of owning real estate and securing your financial future.