Buying land to build your home? Know if you should avail a Plot Loan or a Home Loan

4 MinsJan 27, 2021

Lata Mishra, 28, is thinking of buying a plot of land in her hometown as an investment. She wants to eventually retire there and build a home. However, she does not have enough funds to buy the land and is thinking of taking a loan for the same. After all, “How different can it be than taking a home loan,” she reasons.

land loan and home loan


The reality, though, is slightly more complicated. Let’s see how.

Since both loans are for residential property, how different can they be?
A Home Loan is a loan given for the purchase of a residential property that is already constructed, under construction or will be constructed. A Plot Loan is for buying a plot of land that is reserved for residential property construction.

While most banks offer Plot Loans, these may come with certain conditions. For instance, Axis Bank offers Plot Loans only in selected locations.

In addition, the bank may ask Lata for an undertaking that construction on the plot will begin within 18 months from the date of disbursement towards purchasing the plot. This undertaking will be part of the loan agreement. The bank may ask for proof such as photographs of the construction and architect’s certificate to know stage of construction or the bank’s valuation team may visit to know construction progress.

If for some reason, Lata is unable to start the construction of the house, the bank may ask for the entire loan to be repaid before maturity, i.e. may foreclose the loan, or may increase the rate of interest as per bank’s policy.

[Also Read: A home loan can be yours even without monthly salary slip]

What does reserved for residential property mean?
Land can be used for multiple purposes, such as residential use, commercial/industrial use, or agricultural use. To get a Plot Loan, Lata needs to ensure that the plot of land meets the following criteria:

a. It should not be located in a village
b. It should not be located in an industrial area
c. It should not be designated for agricultural use
d. It should not or will not have any commercial construction on it

Is there any limit to the amount of loan she can get?
Yes, Lata has to keep the Loan-to-Value (LTV) ratio in mind. The LTV ratio is the percentage of loan that a lender will finance, with the rest being paid by the borrower. For Home Loans lenders may extend up to 90% of the value of the property as a loan (this generally depends on the value of the home). But for Plot Loan, the LTV is usually between 65% and 75%.

What this means is that if Lata were planning to buy a home for, say, Rs. 40 lakh, she could probably get a loan of Rs. 36 lakh (90% of the cost of the property). However, if she were to buy a plot of land for the same amount, the maximum loan she could get would be between Rs. 26 and Rs 30 lakh (65% - 75% of the land value). She will have to fund the rest of the amount from her own pocket.

Is there also a limit to the tenure as well?
Home Loan tenures are longer than Plot Loan tenures. A Home Loan tenure may last for as long as 30 years. For a Plot Loan, the tenure is usually capped at 15 years.

What about tax benefits?
Borrowers can claim income tax deductions on both the principal as well as interest repayments on a Home Loan. However, a Plot Loan is not eligible for any tax benefits. The only rebates available to Lata would be if and when she takes an additional loan to construct a house on her plot of land. These are also only available after the construction is complete, unlike for a Home Loan where she could avail of them even if the home was under construction.

Are there any similarities between a Home Loan and a Plot Loan?
The due diligence that a lender carries out for a Home Loan and a Land Loan – in terms of the provenance of the property title is similar. The conditions for the borrower, such as salary, credit score, documentation, etc, too are similar for both loans. The EMI (equated monthly instalments) options for the borrower are also similar.

What if I want to construct multiple houses and sell them?
Another condition Lata has to keep in mind is that a Plot Loan is given only if the purpose is to construct an individual residential unit for self-consumption. If the purpose is to construct a building/apartment and sell the units, then it becomes a commercial loan for which the terms and conditions, interest rates, etc, are different. The bank may even refuse to extend such a loan.

Be it a plot loan or home loan both are available to retail customers and can help you in fulfilling your dream of owning a home. However, it is important that like Lata you carefully analyse and choose the best suited option to realize your home dream.

Disclaimer: The Source, a Mumbai-based content creation, and curation firm has authored this article. Axis Bank does not influence the views of the author in any way. Axis Bank and The Source shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.