Whether you want to purchase an apartment, a piece of land, a villa, or a cottage; there are banks willing to fund these purchases. Of course, the condition is that you should have the repayment capacity and the title and link documents of the properties should be clean. However, in the realm of property funding, there is a subtle difference when your bank funds the purchase of an apartment and when the bank funds the purchase of land. Here we look at land loan vs home loan and their nuances. Being the largest bank in India by a margin, the SBI land and home loan details should be of interest to borrowers.
How are land loans and home loans similar?
In reality, there is not much difference between purchasing a new home or purchasing a plot of land. Both entail the acquisition of an asset, entail a cost and the hope is that property price appreciates over time. What eventually happens is a different story, but the past track record in India is that people have generally done well by investing in land or homes. While home loans are made available for constructed or under-construction property, a land loan is just to acquire a piece of land as an investment. Let us start with the how land loan and home loan are similar?
The similarity in the land loan vs home loan debate is that, both entail taking a loan from a bank to acquire a real estate property with the hope that prices will eventually appreciate. In both the cases, the bank funding the purchase would be interested in the repayment capacity of the borrower, their take-home pay, net worth, liabilities etc on one side; and the title deeds, encumbrances, and link document on the other.
In short, whether it is a home loan or a land loan, the bank needs to go through elaborate due diligence, legal opinion, and valuer opinion before taking a funding call. However, there are also instances, wherein the land loan and home loan funding have some differences.
How is land loan different from a home loan?
Here are some key differences between a land loan and a home loan.
- The purpose of the land loan and home loan are different. The purpose of a land loan is more of an investment while the home loan is to have a place of your own to live with your family. Typically, home loans are availed for ready property or for properties and projects under construction. It can also be a self-construction, and benefits of home loan would still be available. In case of land loan, the current use is only to buy land as an investment. However, the bank lays down a condition that such plots of land can only be used for residential purposes and not commercial purposes.
- How much loan can you get as a percentage of stated property value. In technical banking parlance, it is called loan to value (LTV) ratio. For example, if the bank is willing to fund Rs80 lakhs for a property valued at Rs1 crore, then LTV is 80%. The loan to value ratio or LTV ratio tends to be higher for a home loan than for a land loan. RBI has capped the limits for home loans in the range of 75% to 90%, while for land loans the limit is capped at 75% to 80%.
The idea is that, in an investment, the borrower has more skin in the game with a bigger margin coming from their side.
- The third difference lies in the tenure of the loan. Home loans typically go up to 30 years, although the normal borrowing range is 20 years to 25 years. There are also some NBFCs funding for up to 40 years, but we have to see if such strategies sustain in the long run. On the other hand, land loans are typically not available for beyond 15 years. However, there are several banks and NBFCs that may offer even lower or higher tenure; it varies from lender to lender.
- The fourth and last difference is with respect to tax benefits. In a home loan, the interest is exempt up to Rs2.00 lakhs per year under Section 24, while the principal is exempt under Section 80C, but within the overall umbrella limit of Rs1.50 lakhs. On the other hand, there are no tax benefits in a land loan.
However, should you construct a home on the plot of land, tax deductions are available, but only for the loan amount taken against cost of construction. Also, these benefits can only be availed after completion of the construction activity.
Being the largest and most popular bank, borrowers can consider the SBI Land and Home loan option for their needs.