Except for the fact that home loans are used to finance a built house or under-construction property, there are not many distinctions between a home loan and a plot loan, where a plot loan is used to purchase a piece of land that will be developed later for residential purposes. Banks offer plot loans at higher interest rates only if the borrowers are eligible. Often, plot loans do not provide tax incentives such as home loans.
What is Plot Loans
Banks and financial institutions offer plot loans to people that have decent credit ratings and clean credit records and repayment track to both salaried and self-employed. To purchase property as a potential investment or to create a house in the future, individuals take land or plot loans.
There are various forms of plot loans that will allow you to buy vacant land:
- In a developer scheme or building community, you can buy a plot on a direct allotment
- In a planning authority scheme or a building community, you can buy a plot on resale.
- The defined land plot must be either within the city limits or outside of the city limits, but the plot configuration should be:
- Strictly for housing needs
- Licensed by a responsible body
A fair mortgage (i.e. transfer of ownership/ title deeds from the creditor to the lender) provides the security (or collateral) for plot loans.
Points to note from ‘plot loans’ for credit evaluation
- The margin money (i.e. the contribution of the creditor to the loan amount) for plot loans varies from 30 to 50 percent.
- Up to 70% of the land/plot payment is funded by most lenders (i.e. Loan-to-Value ratio)
- Up to 60% of the fixed-obligation-to-income ratio is given based on the applicant’s net adjusted income.
- Loans from plots are considered riskier. Thus, interest rates on plot loans are a few percentage points higher than interest rates on home loans. Interest rates for plot loans usually range from 8-12%. Few banks give woman borrowers lower interest rates.
- Plot loans are issued for a tenure period of 15-20 years or less, for the most part. The tenure of land loans is typically shorter due to their riskier nature.
- For repayments made against a plot loan, borrowers are not liable for tax benefits
- If building on the acquired plot has begun, nevertheless, the creditor qualifies for tax advantages
- The sum of the plot loan varies according to the location and various other variables.