Land Loan or Plot Loan (used interchangeably) is one of the most confusing subject for borrowers in Loan / Mortgage segment. Confusion is normally between Home Loan, Land Loan and Composite Loan. All three are different products with different features, benefits, Terms and Conditions. Unfortunately all three i.e. Home Loan, Land Loan and Composite Loan are loosely referred as Home Loan only. At macro level, Land Loan is sanctioned only for purchase of residential plot or piece of land. Composite Loan is Land Loan + Construction Loan i.e. to complete construction on plot. In most of the cases, my clients are not aware whether they have availed Land Loan or Composite Loan. A land loan can be availed only to purchase a Non-Agricultural plot or piece of land which is under Municipal / Local development authorities limit. HDFC provide land loan for residential plots outside city limits but subject to certain conditions. Composite Loan is altogether a separate topic which i will discuss in my next post. This post is dedicated to some of the most important facts related to Land Loan. As a borrower you should be aware of these facts to avoid any future shock.
7 Facts You Should Know About Land Loan
(a) Commencement of Construction: As i understand that confusion between composite loan and land loan is caused by “Construction” clause / condition attached to Land Loan. All Land Loans are sanctioned with a pre-condition that construction on the Land / Plot should commence within stipulated period. Just to clarify that in composite loan, the cost of construction is included in the loan value. Whereas in land loan, it is only pre-condition to sanction the loan. A borrower of land loan may avail construction loan in future to complete construction on plot. The catch is when you are buying a land at substantial premium then loan provider approve composite loan under the umbrella of Land Loan to increase loan eligibility. Borrower is not aware that cost of construction is included in the loan. He cannot avail construction loan in future and does not have any other option but to sell the land.
If you are not planning to construct in near future then it is advisable to opt for HDFC Land / Plot Loan. The reason is HDFC provide maximum grace period to commence construction among all loan providers. Under HDFC Plot Loan, Borrower has to commence construction on the land / plot within 5 years from the date of 1st disbursement. This period is normally 2 years with other lenders like SBI. If you are buying a plot or land for investment purpose then HDFC is best option as you can sell within 5 years and book the profits. Usually appreciation on land is higher compared to flat.
(b) Penalty for Non-Commencement of Construction: Normally lenders are not willing to approve Land / Plot Loan. Reason being, land as such is non-revenue generating asset and main concern of a lender is how the borrower will pay EMI. Secondly, Land purchase is mostly speculative in nature. In order to address these concerns, commencement clause is included in all the Land / Plot Loans. Now you must be wondering what if, i don’t commence construction within stipulated period. In this case, either of following scenario is possible
– Plot / Land Loan provider can increase your Interest Rate of Plot Loan. Normally this increase is upto 2% over and above existing interest rate.
– You may be asked to prepay the balance outstanding and close the Plot / Land Loan.
In order to avoid these penalties, it is advisable to check the grace period allowed under the loan agreement and start construction within stipulated period.
(c) Income Tax Benefits on Land Loan: This is biggest mis-conception that Land Loan is Home Loan therefore tax benefits of Home Loan are also available on Land / Plot loan. Let me clarify that Loan on plot or land does not qualify as Home Loan therefore INCOME TAX Benefits are NOT available on Land Loan. Even if you complete construction on plot / land to be eligible for Home Loan. Any interest paid before completion of construction cannot be claimed as Pre-EMI interest like Home Loan. Ironically i have to list this post under Home Loan category as readers will search for post on Plot Loan under Home Loan only :).
(d) Loan to Value Ratio: The LTV or Loan to Value ratio is normally 80% for Home Loans. The LTV for Land / Plot Loan is between 60% to 70%. Some lenders mention that they fund 80% of property value but it is based on market value assessed by them independently. For example, you are buying a plot for 40 lakh but loan provider’s assessment of market value is 30 lakh. In this case, loan provider will sanction 80% of 30 lakh i.e. 24 lakh as Land Loan. 24 lakh will be 60% of actual consideration value.
(e) Higher EMI’s / Low Loan Tenure: If you are borrowing X amount for Home Loan and same amount for land loan, the EMI will be high under land loan. Reason being, pure land / plot loans are sanctioned for short tenure. It also depend on age of borrower, repayment capacity etc. Normally land / plot loans are approved for 5 – 10 years therefore EMI is high. Rate of interest is usually same as Home Loan Interest Rate.
(f) Prepayment Charges: As Land Loan does not qualify as Home Loan therefore loan provider may impose prepayment penalty. It is always advisable to clarify the same at the time of availing Plot Loan. As i checked websites of loan providers, normally penalty is imposed on borrowers classified as “other than individual”. I am not sure how they will classify individual and non-individual. It seems they are referring to non-salaried people like self employed as “other than individual”.
(g) Legal Compliance: The legal compliance of land or plot is more complicated compared to flat. There are complexities like conversion from agricultural to residential or legal heirs issue. Secondly, in most of the states land records are not digitised therefore it is advisable to check legal compliance before buying or applying for land loan. In my post 10 points to consider before you buy land i shared how to buy a land & imp points to consider. Probability of loan rejection is high for land loan compared to Home Loan. To be on safer side, you can buy developed plot from builder preferably in gated community. It is easier to get loan on developed plot. Secondly there are some builders who specialize in plots / land. They might not be as popular as builders who are in construction business. You can identify such builders in your city for developed plot.
It is always good to be an alert investor. Before applying for land loan, you should check all details to avoid future shocks. Almost 90% borrowers don’t go through loan agreement but it is always advisable to check the terms and conditions of the agreement. I agree language used is complicated but you can always take help of a lawyer. Recently when i suggested same to one of my client, she told me that if she will go through the land loan agreement then she may not be able to avail the loan. I agree with her to some extent. For her “Ignorance is bliss” but it may prove very costly in future.
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