Difference Between Home Loan and Land Purchase Loan Explained

In India, there are different types of Home Loans, like house purchase loan, home construction loan, plot loan (land purchase loan), home improvement loan, etc. Each of these loans serves a specific purpose. For instance, if you're planning to buy a home or flat, applying for a regular Home Loan would be apt. But if your planning to purchase a plot or land, a more suitable product would be a land purchase loan or plot loan. 

In this article, we will dive deep into the difference between home loan and land purchase loan and explore the key considerations that can help you make an informed decision. 

What is a Home Loan?

A home loan is a secured loan that offers financing for the purchase of a house or property. For the uninitiated, secured loans are loans that are disbursed against a collateral. In the case of home loans, the house or property you're planning to buy acts as a collateral, meaning the bank becomes a part-owner of the property till you repay the loan in full. In case of loan default, the bank may seize the property to recover the cost. 

By the way, you can take a home loan to purchase a land, provided it's a residential plot. However, you need to ensure to construct a house on the purchased land within 2 years from the date of loan disbursal.

Some of the key aspects of home loans are as follows:

• Allows you to fulfill your dream of owning a home without waiting for years to accumulate enough savings.
• Provides flexibility in terms of repayment tenure, usually ranging from 15 years to 20 years.
• Offers tax benefits on both principal repayments (under Section 80C) and interest payments (under Section 24(b)) of the loan. Other tax benefits include Section 80EE and Section 80EEA (subject to terms and conditions). 
• Your house acts as a collateral till the loan is repaid in full.
• You can get up to 85% financing of the property price. Rest of the amount has to be paid from your pocket as down payment.
• Usually comes with a home loan insurance (not mandatory but recommended).
• Loan is repaid via EMIs (Equated Monthly Instalments). 
• Two interest rate options available - floating rate loans and fixed rate loans. No foreclosure charges for floating rate home loans.

What are Loans for Land Purchase?

Land loan or plot purchase loan is a secured loan designed specifically for land or plot purchase on which you can construct a house or property in the future. Like home loans, it's a secured loan. However, there are certain differences. For example, it's necessary for the land to be within the location limits of the municipality. Interest rates of land loans could be higher than home loans, resulting in higher EMIs.

Key Considerations:

• Designed specifically for land or plot purchase.
• Loan tenure is usually shorter, often up to 15 years.
• No tax benefits offered if you buy a plot with no intention of constructing anything. However, you can avail tax benefits if you take an additional loan to construct a house on the purchased land. But this is allowed only after the construction of the property.
• Most banks offer maximum 70% financing of the cost of the plot.
• Loan amount has to be paid in EMIs.
• Foreclosure charges are generally applicable.

Comparing Home Loan vs Land Purchase Loan

Now that we've explored the basics of home loans and land purchase loans, let's compare them based on some key parameters:

Home Loan vs Land Purchase Loan: Which Loan is Right for You?

Choosing between a home loan and a land purchase loan depends on your specific requirements. Here are some scenarios to consider:

Scenario 1: Building Your Dream Home

If you plan to construct a house on the purchased land, a home loan would be more suitable. It allows you to finance both the land purchase and construction costs under a single loan.

Scenario 2: Investment in Land

If your primary objective is to invest in land for future development or resale purposes, a land purchase loan would be more appropriate. It enables you to acquire the land without tying up your existing funds.

Scenario 3: Immediate Possession

If you're looking for immediate possession of a constructed property, such as an apartment or house, a home loan would be the right choice as it caters specifically to these requirements.

Bonus Tip: Difference Between a Land Loan and Composite Loan

We've come across customers enquiring about composite loans. In simple words, composite loans combine land purchase with construction of house, meaning the loan covers both - financing for plot purchase and construction of house on that particular plot. However, such is not the case for land purchase loans. You can use the loan amount only for land purchase. For house construction, you have to take a home construction or home purchase loan.