17 MAY, 2021

Buying a house is among the top priorities for many individuals. While a home loan is a popular financing option for purchasing a property, many aren’t yet aware of the nuances of a land loan. Most individuals use the term ‘home loan’ and ‘land loan’ interchangeably, but the fact is that both these loans serve different purposes. To help clear your doubts, we are going to shed some light upon the major differences between a home loan and a land loan. This, in turn, will give you a better idea as to which type of loan you should avail depending upon the requirements.

Difference between Home Loan and Land Loan

  • Purpose of the loan

    Home loan can be availed for buying a new or pre-owned house, under-construction house, or for building your own house. On the other hand, a land loan is availed for purchasing a plot of land, provided it lies in the municipal corporation limits, and is any of the following:
  • Non-agricultural land
  • Residential
  • Non-commercial
  • Not an industrial area
  • Not located in the village

    With the help of leading banks and other financial institutions, you can easily avail a home loan or land loan through a hassle-free loan application process.
  • Loan to Value (LTV) Ratio

    The Loan to Value (LTV) Ratio is the ratio of the loan amount that can be availed against the value of the property. In the case of a home loan, the LTV ratio can range from 75-90% of the property’s value, whereas for a land loan, the maximum LTV is capped at 75-80% of the plot’s value depending on the loan amount. However, if you need more funds to take care of additional expenses such as home renovation, expansion, etc., you can opt for a top up loan by contacting your lender. A top up loan is a financing option that is offered over and above your existing loan amount.
  • Loan tenure

    Home loans come with a longer tenure as compared to land loans. The maximum tenure of a home loan is 20 years, whereas land loans are offered for a maximum tenure of 15 years.
  • Tax benefits

    Under Section 80C of the Income Tax Act, you can avail a deduction of Rs 1.5 lakh on the principal amount repayment. Moreover, Under Section 24, a deduction up to Rs 2 lakh can be availed on the interest payable. It must be noted that land loans are not eligible for any tax benefits. However, if you construct a home on the purchased plot, you can avail tax benefits for the amount used in the construction of the house.
  • Eligibility criteria

    Home loans have simpler eligibility criteria as compared to land loans. Any Indian resident who is between 21 and 65 years of age, salaried or self-employed, and satisfies the minimum income criteria can avail a home loan without much hassle. It must be noted that the home loan eligibility criteria may slightly vary for different lenders. In the case of a land loan, lenders usually grant the loan amount only to those borrowers who are certain of constructing a home on the purchased plot within the specified time. Moreover, for Non-Resident Indians (NRIs), availing a land loan is even more difficult due to various government regulations.
  • Interest rate

    Lenders consider land loans to be riskier as it can be difficult to determine the accurate worth of the plot. Consequently, interest rates charged on land loans are slightly higher as compared to home loans. At present, it is possible to avail home loans at around 7.50% per annum, whereas land loans can cost anywhere between 8% and 10% per annum.
  • Documentation

    The documents required to avail a land loan and home loan are the same. Some of the basic documents required are mentioned below:
  • Loan application form.
  • Passport size photograph.
  • Identify proof – Passport/PAN Card/Driving License
  • Residence proof – Aadhaar Card/ Electricity Bill/ Ration Card
  • Bank Account Statement/Passbook for last 6 months.
  • Salary Certificate from the employer.
  • Form 16/IT Returns for the past 2 financial years.

    To sum it up, a home loan is a better option if you wish to purchase a flat or under-construction property, whereas, if you wish to build your own house by purchasing a plot, you must go ahead with a land loan. Irrespective of which type of loan you settle for, ensure to read the terms and conditions carefully before signing the loan agreement.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.