A plot of land to build a dream house is a fascinating experience and fruitful investment which grows in leaps and bounds in value over the period of time. Hence, to purchase a plot loan and build a house at the same time is a hefty investment as well which may result to exhaustion of the savings and liquidation of other assets. So it simultaneously comes up with a query of how to get a plot purchase loan?
Historically Indians have been purchasing plots of land for various purposes predominantly as a bulk investment. But in the modern era of financial extravaganza through various products of loans from banks and NBFCs has made it very easy for a person to fulfil the desired dream of building a house on a land purchased of its own.
What is a plot Purchase Loan?
A plot purchase loan as the name suggests is a loan provided by banks and NBFCs to borrowers for the purchase of a plot of land. The repayment is done in Equated Monthly Instalments (EMI) within a specific tenure prescribed by the bank or NBFC from where the loan been availed. If a person is looking for a plot purchase loan, the following information will help him or her to choose the best lender in form of bank or NBFC.
Features of Plot Purchase Loan:
Land Loan Interest Rates:
The rates of interest in the case of a plot purchase loan and home loans are similar. However, some banks offer a couple of basis points higher rates for plot purchase loans than home loans. Banks provide a stipulated time for construction over the plot, and therefore the borrower is required to submit an estimate for the construction with the lender bank or NBFC.
If the borrower doesn’t make construction over the plot within the stipulated time frame as set by the lender bank or NBFC from the date of the first disbursement, then the interest rate structure of the plot purchase loan for the borrower will get changed from a home loan to a loan against property.
Loan to Value Ratio:
Loan to value or LTV means the quantity of loan which a borrower will get against his property. LTV, in case plot purchase loan with construction, is significantly lower and will be capped at a maximum of 70% of the land value. In the case of home loans, LTV ranges between 75% to 90%.
Lower Tenure:
Plot purchase loan have relatively shorter tenure which can be a maximum period of fifteen years, such isn’t the case in home loans, which is accompanied by an extended tenure of 30 years. Therefore, the EMI within the case of a plot purchase loan is above that of normal home loans. The tenure for a land loan also depends on the age of the borrower, repayment capacity, etc.
Tax Benefits:
Home loans qualify for a tax deduction on payment of the principal amount under Section 80C of the Income Tax Act also as the interest component under Section 24(b) of the Income Tax Act. On the other hand, tax benefits toward land loans aren’t available.
However, borrowers could claim a tax deduction on a loan if the home is constructed on a plot purchased by the borrower. A borrower can claim a tax deduction against the loan amount taken for construction, after the completion of construction on the plot.
Prepayment Penalty:
Floating rate loans sanctioned to individual borrowers are free from the prepayment penalty if a borrower wants to foreclose the loan. However, a land loan sort of a home loan could attract prepayment charges of 2 to 4% of the prepaid amount if the non-individual borrower has taken it. A borrower should read the loan agreement carefully and clarify the foreclosure charges of the loan before signing the agreement.
What are the Advantages of a plot Purchase Loan?
A plot of land ideal for the construction of a habitable house is considered to be very limited and equally expensive and for that reason it becomes a thing beyond affordability for a normal person with limited income. Thus availing a plot purchase loan make the whole thing easier and turns it into a worthwhile investment which gives better returns on a resale.
Plots can be considered as affordable comparative for individuals if the loan for the plot purchase is availed right on time.
As an investment purchasing a piece of land has little or no waiting time for a substantial return.
It gives the buyer every bit of freedom and flexibility to start building their own house according to their own specifications and design.
How is a plot Purchase Loan different from a Home Loan?
This is a common query that is raised when discussing home loans and plot purchase loans, at first sight, they do seem to meet the same purpose, but they are quite different as we shall see.
Difference 1:
A home loan is provided for a property that is built, under construction and or undergoing restoration and extension, while a loan for plot purchase is predominantly given for purchase of a piece of land or plot.
Difference 2:
The Loan to Value ratio for a home loan is about 80%, for loans above 3 lakhs the LTV is 90%; while the LTV for a plot is 50-70%.
Difference 3:
The tax benefits which are available on a home loan are not available on the land and plot loans.
Difference 4:
Home loans tend to be longer up to 30 years even, while the plot purchase loans are extended up to 15 years.
Difference 5:
Another factor that is considered while taking up a land loan is the presence of 2-5% of foreclosure charges that are absent in a home loan. These are the primary differences between a home loan and a plot purchase loan.
What is the Difference between Plot purchase loan & Plot purchase and Construction Loan?
Plot Purchase Loan:
A plot purchase loan can only be availed for the acquisition of a vacant residential plot or a piece of land which may be later used to construct a house or for investment purpose. The property should be located within the municipal or corporation limits. This kind of loan may be a high-risk loan, and there aren’t any tax benefits.
The interest rate varies for each bank; however, it primarily depends on factors like employment type, the amount of loan for plot purchase, and therefore the variant of the loan. Certain banks offer attractive rates of interesting the borrower is women.
Plot Purchase and Construction Loan:
This loan is availed to get a residential plot and construct a house on the property within the stipulated time. If a borrower doesn’t commence construction within the required period, then the bank can increase the rate of interest on the loan.
Documents required for plot purchase loan in case of salaried and Self-Employed Persons:
- Id & Address proof (any one required) of applicant and co-applicant
- Aadhaar card, PAN card (mandatory, if income is considered for loan eligibility calculation), valid passport, voter ID card, driving license in Case of self-employed non-professionals ITR for the last three years, trade Licences of the business for the last three years.
- Utility bill: electricity, telephone, postpaid mobile, water bill etc., ration card
- Letter of appointment from employer and salary slips for the last three months along with form 16 for the last two years.
- Bank statement /copy of passbook reflecting address
- Valid rent agreement if the present address is rented.
- agreement for sale and property papers in the form of title deed and chain deeds, mutation certificates, updated property tax receipts, and records of rights (if applicable).
What are the charges for a plot purchase loan?
There are two different types of expenses involved before and after a plot loan is approved.
The first is the pre-sanction charge, which incorporates the fees for an inquiry of the property and verification of legal ownership of the property. Then there are fees for valuation of the plot, which determines the property value and therefore the amount of loan the applicant is eligible for.
After that, there are post-sanction charges like stamp duty and property insurance alongside applicable registration fees and taxes.
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