Land Loan vs Home Loan: What is the Difference?

The borrowers can apply for land loans and home loans against the property for which the loan is being taken. A land loan can be taken to finance the purchase of land or plot. A home loan can be taken for various purposes, like purchasing a home, renovation/restoration of the home, construction/ extension of the home , etc.

While both the loans are associated with property purchase, there are several differences between the two. It is crucial to comprehensively understand the following associated with land loan vs home loan:

1. The plot/land must be only for residential use.
2. It must fall outside the industrial or village areas.
3. The land must not be agricultural or commercial.
4. It must be located within the limits of the municipality or relevant corporation.

1. Property Type: To apply for a land loan, the property in question must be a residential plot. However, banks and NBFCs offer home loans for already-built houses, under-construction houses or those on which construction has been sanctioned.
2. Property Location: home loans are provided irrespective of the location or magnitude of the property. But, in the case of land loans, there are certain limitations:
3. Maximum Extent of Loan: In the case of home loans, the borrower can expect to procure a loan equivalent to up to 90% of the total property value. Meanwhile, land loan seekers can expect only a maximum of 70% funding. This difference in loan to value (LTV) extent occurs due to home loans being associated with the already constructed or soon-to-be constructed property. Land loans are based more on speculation of future use.
4. Tenure of Loan: Home loan tenure can extend to a maximum of 30 years, while land loan tenure is only limited to 15 years or up to 20 years in the case of NBFCs.
5. Interest Rate Levied on Loan: Interest rate levied on home loans is just about 1-1.5% less than that of land loans.
6. Tax Benefits: The borrower can avail tax benefits on both the interest and the principal amount paid for the home loan. However, no such tax benefit is available for land loan applicants. The only form of tax rebate in a land loan is on the amount of loan that has been procured for construction. This becomes a significant factor when weighing land loan vs home loan.
7. Legal Formalities: The legal verification process for home loan procurement is less tedious as compared to that of the land loans. It often becomes important to hire legal aid to apply for land loans.

There might be only three similarities between the two types of loans:

1. Both are loans for property purchase
2. Both are secured loans.
3. Both involve additional processing charges to be paid by the borrower.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.