Purchasing a piece of land is the first step toward building a dream home. However, financing this dream can be challenging without the right knowledge about plot purchase home loans. When you are looking to buy a plot for a future home, you need to know about securing a loan for the plot purchase, their requirements, eligibility criteria, etc. Read today’s Brick & Bolt blog to understand more.
What is a Loan for Plot Purchase?
A loan for plot purchase is a type of property financing used to purchase a piece of land on which one plans to build a residential home in the future. Traditional home loans will be used to purchase an already constructed house; on the other hand, plot loans will provide funding to buy the land. This loan is provided to get a residential plot and construct a house on the property within the specified time. If a borrower doesn’t start construction within the required period, then the bank can increase the rate of interest on the loan.
Read: How to Get Home Construction Loan in India | Brick&Bolt
Key Features of Loan for Plot Purchase
Interest Rates for Land Loans: The interest rates for land and home loans are similar. However, some banks may charge slightly higher interest for land loans. Banks will give a time limit to initiate construction on the plot. Thus, the bank demands borrowers to provide a construction certificate. If the borrower fails to start construction on the land within the time limit, the interest rate structure will change from a home loan to a loan against property.
Loan-to-Value Ratio: Loan-to-value, or LTV, means how much loan you can get compared to the property value. For a loan for plot purchase and construction, banks offer a lower LTV, usually up to 70% of the land value. For home loans, LTV ranges between 75% to 90%.
Loan Tenure: Loan tenure is the time frame over which a borrower needs to repay a loan, along with interest. Loan tenure for a plot plus construction loan in India typically ranges up to 30 years for salaried individuals, depending on their age at loan maturity. For self-employed borrowers, the tenure might be limited to 20 years, subject to the lender’s policies and the borrower’s age. However, these terms can vary across different banks based on their specific policies and risk assessments.
Tax Benefits: Borrowers can get tax benefits on plot loans only if they build a house on the plot purchased. These benefits apply after the completion of construction on the plot.
Prepayment Penalty: If you take a loan for plot purchase with a floating interest rate, you don’t have to pay extra charges for early repayment if you are an individual borrower. However, non-individual borrowers (like companies or partnerships) may have to pay a prepayment charge of 2% to 4% of the amount repaid. Always check the loan agreement carefully and ask the lender about any foreclosure charges before signing.
Why Consider a Loan for Plot Purchase?
By taking a bank loan for land purchase and building a house, you can get many benefits with ownership, such as:
Safe Investment
Investment in land by taking a plot loan is very safe. Land value in specific locations can increase over time. Along with urbanisation and population growth, you can expect higher demand. Adding value to a built house.
Customisation Opportunities
Purchasing a plot allows for customising the construction according to personal needs and preferences. This flexibility enhances the property’s value and usability, as noted by real estate experts who stress the importance of tailored living spaces.
Financial Flexibility with a Home Loan
Making use of a loan to buy land enhances financial flexibility, making it attractive for more individuals. Loans for plot purchases provide competitive interest rates and flexible repayment plans, making them financially accessible. Banks offer structured payment options that help manage cash flow effectively, allowing borrowers to balance their finances while investing.
Tax Benefits on Plot and Construction Loan
You can claim a tax deduction on a plot purchase and construction loan only if a house is constructed on the plot. The plot loan must be converted into a home loan after construction is completed to qualify for interest deductions under Section 24 of the Income Tax Act.
Section 24 Deduction: The interest on the plot loan can be reduced under Section 24 up to ₹2 lakh annually for self-occupied properties once the loan is converted into a home loan after construction.
Section 80C Deduction: The principal repayment of the plot loan is eligible for a tax deduction under Section 80C, up to ₹1.5 lakh annually. This includes stamp duty and registration fees if paid in the same year as the construction completion.
Time Limit for Construction: The construction should be completed within five years from the end of the fiscal year in which the loan was taken to avoid reduced deductions.
Eligibility Criteria for Loan to Buy Land
When considering a loan for plot purchase, you need to understand whether you are eligible for that.
The following are eligibility criteria you need to keep an eye on:
Age Requirements
The minimum age requirement to get a loan for plot purchase is generally set at 18 years, legally for the majority of states in India. However, banks and lenders usually prefer borrowers to be between 25 to 65 years old.
Income and Employment Stability
Your credit score is very important when applying for a loan for plot purchase. Most banks need a credit score between 620 and 700 to approve a loan. A higher score helps you get better interest rates and loan terms. Paying your debts on time improves your credit history. Before applying, check your credit report from all three bureaus to fix any mistakes that might lower your score.
Documentation Required
To take a bank loan for land purchase you need to have identity documents such as a PAN card, Aadhaar card, voter ID, valid passport or driving license ready to ensure KYC compliance. Income proof typically includes the last three months’ salary slips for salaried individuals, income tax returns, and bank statements for self-employed applicants. Other supporting documents such as property-related paperwork, documents from the builder, and a formal application form.
Step-by-Step Guide to Apply for a Plot Purchase Loan
You can apply for land loan by following the following steps:
Research and Compare Lenders
Different banks and finance companies have different loan rules, interest rates, and fees. Look at multiple lenders to find the best deal. Use online tools to compare interest rates, repayment options, down payment amounts, and customer reviews. This will help you choose the best lender for your needs.
Check Eligibility and Gather Documents
After selecting potential lenders, check your eligibility based on their criteria and gather required documents, including identity and income proof, credit history reports, and other necessary paperwork.
Submit the Loan Application
Having documented the necessary criteria, applicants can formally submit their loan application to the chosen lender. This submission should ideally be accompanied by all supporting documents, which will allow the lender to assess the application efficiently. A well-prepared application can alleviate some common delays in the processing phase.
Property Verification and Approval Process
Once the application is submitted, the lender will initiate a property verification process. Legal and technical experts generally review the property documents to ensure legality and ascertain the property’s value through an appraisal process. This verification aims to confirm that the land has a clear title and is free from any legal disputes or encumbrances that may affect the purchase.
Disbursement of the Loan Amount
Upon successful completion of the property verification and the approval process, loan disbursement occurs. This is where the lender processes the loan amount, transfers the funds, and officially facilitates the purchase of the plot. Borrowers can expect the disbursement timeframe to vary, typically ranging from one week to several weeks, depending on the complexity of the application and the lender’s efficiency.
Common Mistakes to Avoid When Applying for a Plot Loan
When applying for a plot loan, avoid these common mistakes to ensure a smooth process and favourable terms:
Not Verifying Legal Status: Failing to confirm the plot’s legal status can lead to disputes or loan rejection. Ensure the property has a clear title and is free from encumbrances.
Ignoring Additional Costs: Many borrowers overlook charges like processing fees, legal verification costs, and title insurance, which can increase the loan’s overall cost.
Overlooking Credit Score: A poor credit score can result in higher interest rates or rejection. Check and improve your score before applying.
Not Comparing Lenders: Different lenders offer varied terms. Compare interest rates and fees to secure the best deal.
Getting a loan to buy land needs good planning, research, and smart money management. If you understand how these loans work, prepare the right documents, and choose a good lender, you can make your dream of owning land come true.
Every land purchase is different. This guide gives you important information, but talking to financial experts and doing your own research will help you make the best decision for your needs.
Hemali Patel