You don’t like apartment life. You want to construct your house on a small piece of land and live there peacefully. Another reason for such a choice could be that you are not getting quality apartments in the city where you want to stay. And this can be a problem in smaller cities. The issue is that you need money to purchase a residential plot. You are aware that you get home loans to purchase an apartment or construct a house on a plot of land that you already own. You are not sure if you can get a loan to purchase residential plots too. Don’t worry.
There are loan products that can help you purchase residential plots too. In fact, You can take a separate loan for construction of house on the same plot. For instance, SBI permits you to take SBI Realty Home Loan to purchase a plot and a separate home loan for construction of house on the same plot. Let’s find out more about such loan products (plot loans). In this post, I will focus only on loans for purchase of residential plot. Many banks may offer loans to purchase other kinds of lands too.
What Is the Eligibility Criteria for Plot Loans?
In addition to usual limits about the applicant age, there may be limitations on where you can purchase a plot through a loan. Most banks will limit the plot location to be within municipal or corporation limits. You will also get loan for purchase of a plot allotted by local development authorities.
Points to Note
- Under a plot loan, the bank may require you to construct a house on the said plot within a stipulated time period (say 2 to 5 years). For instance, SBI Realty Home Loan requires you to complete construction within 5 years from the date of sanction. If you do not complete the construction of house within stipulated period, the bank may ask you to foreclose the loan or may charge you penal interest. With such a restriction, the banks want to discourage purchases for pure speculation. You must keep such conditions in mind. If you are not planning to commence and complete construction in the next years, then it can spell trouble for you. Go through the terms and conditions properly to assess impact.
- The plot loans may be available in both fixed rate and floating rate variants. For instance, HDFC offers both options to the borrowers. However, even the fixed rate loan is fixed for only a few years. After 3 years, it automatically converts to be floating rate loan.
- There may be a prepayment penalty in case of fixed rate loans.
- The bank will create security on the plot that you purchase through use of such funds.
Buying a residential plot can be risky for two reasons. First, you have may to do greater due diligence in terms of ownership, land use etc. Second, you also need to protect it from encroachment/illegal occupation etc. Therefore, be sure about what you are getting into.
How Much Loan Can I Get?
You can get loan up to 70% of the market value of the plot. Respective banks may lend as per their internal credit guidelines. Clearly, the LTV (loan-to-value) is lower than those of home loans. SBI caps the maximum loan amount under such loans at Rs 15 crores.
What Is the Interest Rate and Tenure of Such Loans?
You can expect the loan for plot loans to be around home loan interest rates only. The tenure of the loan is typically shorter than home loan tenure. While tenure for home loans can go up to 30 years, the plot loans have to be repaid within 10-15 years. For instance, SBI provides a maximum loan tenure of 10 years while HDFC limits the loan tenure to 15 years. A shorter loan tenure means a higher EMI (for the same loan amount and the interest rate). Ensure that your cashflows can support such repayment. After all, you may have to take a loan for the construction too.
Tax Benefits for Repayment of Plot Loan
There are no tax benefits under Section 80C or Section 24 on repayment of loan for purchase of land/plot. Such tax benefits are available only for repayment of home loans. In any case, there is no question of tax benefit if you do not use the proceeds to construct a house on the said plot. However, once the construction of the house is complete on the said plot, you may request your bank to convert your plot loan to a home loan. Even in this case, there won’t be any tax benefit for the interest paid for the under-construction period. Only subsequent interest payments and principal repayments will qualify for tax benefits.
Do note, in case of a home loan, the interest paid during the under-construction period can be considered for tax benefit in 5 equal instalments starting from the year of completion. No such relief for plot loans.
As I understand, depending upon wordings of the loan agreement, the loan could be a composite loan for purchase of plot and construction of house. In such a case, you may be eligible to avail tax benefit for the loan (just like a regular home loan product).
Disclaimer: Please understand I am not a tax expert. Therefore, if you have tax considerations in mind while you apply for a plot loan, do consult a Chartered Accountant (or a tax consultant) before you decide.
A plot loan is not too different from a home loan. Unless you are a speculator/investor, the end result should be your dream house. However, there are still a few significant differences. You need to be aware of grace period for construction of house to avoid any penalties on the loan. And yes, don’t ignore the differences in tax benefits.