Which is the Best Option: Land Purchase Loan or Home Loan?

Indians invest in land - they always have, and they always will. Even those who own a home, try and save enough money to be able to buy a piece of land. The reason is understandable - when you buy a home or flat in a society, you can only change it to a certain limit to make it suit your taste. However, when you buy a piece of land, you can construct a home on it the way you like. Further, many Indians buy land as an investment because it is said that the value of land appreciates more than the value of homes or flats. Now, if you are planning to buy land, a home loan won't work - Home Loans can only be used to buy homes. To be able to buy land, you will need a land purchase loan.

Before we go ahead and discuss more, let us understand the key differences between land purchase loans and Home Loans.

Land Purchase Loan vs Home Loan: What's the Difference?

Before we begin with the comparison, know that a land purchase loan is in fact a loan against property. Since you cannot buy a plot of land using a housing loan, you have to take a Loan Against Property which can be used for buying a plot of land. You need to bear in mind though that to get a Loan Against Property, you have to have an existing property, like a house. Let us learn more differences.

End Usage

The biggest difference between a land purchase loan and a Home Loan is that while a Home Loan can be used to buy a flat or an already-constructed or under-construction property, a land purchase loan can only be used to buy a piece of land that you plan to use for residential purposes. 

Tax Benefits

In the last few years, the popularity of Home Loans has increased considerably. Even those who have enough money to buy a home without taking a loan choose to opt for a Home Loan to fund their purchase. One of the most important reasons for this is that Home Loans offer tax benefits. Under various sections of the Income Tax Act, borrowers can claim deductions up to a maximum of Rs.1.5 Lakh on payments made towards principal repayment and up to a maximum of Rs.2 Lakh on payments made towards interest repayment. 

People Also Read: Top-up Loans and How to Avail of Tax Benefits  

On the other hand, land purchase loans do not offer any tax benefits until of course a borrower takes another loan to construct a property on the land they have bought. In this case, the borrower can claim tax benefits available in the case of Home Loans after the construction of the property is complete.

LTV Ratio

Whether you are planning to take a Home Loan or a land purchase loan, you must understand the meaning of the loan-to-value ratio. 

The loan-to-value ratio is the percentage of a property's value that one can get as a loan. In the case of Home Loans, the LTV ratio stands anywhere between 75% and 90%. In other words, one can get 75% to 90% of a property's value as a loan. In the case of land purchase loans, borrowers can get up to 80% of the land's value as a loan. The remaining 20% has to be arranged by the borrower.

Tenor

Yet another difference between Home Loans and land purchase loans is the tenor involved. In the case of Home Loans, borrowers get up to 40 years to repay the loan. This is a long enough period and therefore, in the case of home loans, borrowers often find it easy to repay the loan in a stress-free manner. On the other hand, in the case of land purchase loans, borrowers get only up to 17 years to repay the loan. However, in most cases, borrowers also borrow a much lower amount when they opt for a land purchase loan than when they opt for a Home Loan. 

People Also Read: Pick the Best Home Loan Tenor that Suits Your Budget 

Refinancing Options

Another difference between a Home Loan and a land purchase loan is that when it comes to Home Loans, people can refinance or opt for a  Home Loan Balance Transfer if they get tired of their current lender's service or they find another lender offering a better interest rate. However, in the case of land purchase loans, not many lenders offer this option and even when they do, they always come with some terms and conditions attached.

Which is the Best Option: Land Purchase Loan or Home Loan?

Choose the right loan that meets your requirements. If you plan to buy a piece of land and you already have a property that you can use as a mortgage, take a land purchase loan which is a Loan Against Property. On the other hand, if you are planning to buy a home, take a Home Loan.   

Also Read: Home Loan vs Construction Loan 

*Terms and conditions apply.