Loan Basics. Lowdown on land loans

Many of us prefer to buy land and build a dream home on it instead of purchasing an existing property, no matter how difficult it is to seek approvals, haggle with contractors or find a good architect. To help turn your dreams into reality, many banks offer loans to buy a plot too.

Both salaried and self-employed professionals buying land for construction or investment purposes can apply for the loan. Besides Indian residents, banks also offer loans to non-residents, with certain conditions attached. For instance, most banks offer land loans to non-residents if the land is bought to construct a house and funding is given only after the land is bought and construction started.

The tenure of the loan can vary across banks and housing finance companies. HDFC and Indian Bank, for instance, offer loans for a maximum period of 15 years, whereas Dewan Housing Finance offers a 1- to 20-year repayment schedule.

Unlike home loans, which offer a loan-to-value of 80-85 per cent of the price of the property, most plot loans offer only 60 per cent. So be prepared to pay a bigger down-payment in case of such loans. Players such as HDFC offer up to 75-80 per cent of the property cost, which depends on market value of the plot and also the risk assessment by the financier. Some lenders also restrict the loan amount based on the location of the plot. For instance, HDFC restricts the loan amount to 70 per cent of the cost if the plot is located outside city limits.

Remember that a plot loan is only available for buying a plot for residential use, construction or investment purposes. These loans are not available for buying agricultural land.

Also, banks usually have restrictive clauses that require the borrower to commence/finish construction based on the loan within a stipulated period. For instance, in the case of HDFC, you have to commence construction on the said plot within five years from the date of first disbursement, or else you could be charged 200 basis points, or more, higher interest above the applicable rate.

Similarly in the case of Indian Bank, construction of the house has to commence within two years from the date of availing the loan or from the date of handing over possession by the Government Housing Development Agency.

ICICI Bank needs construction to be completed within two years from the date of availing the first loan disbursement from the bank.

The rate of interest charged on a plot loan is usually on par with the rates that are applicable to a home loan.

Some banks though charge a tad higher rate. For instance, Indian Bank offers a variable plot loan that offers 1 per cent above the rate on a floating rate home loan. HDFC offers both floating and dual rate (fixed for a period, and then floating) loans. Banks charge 1 to 2 per cent processing fee for all land loans. But unlike home loans, you are not eligible to claim income tax deduction for principal repayment on a plot loan, or for payment of interest either.

“In case you obtain a housing loan and start construction activity on the purchased plot, you can claim tax benefits on both the loans. One important thing to note is that tax deduction is applicable only in the year in which the construction is completed and only after submission of the completion certificate,” says Adhil Shetty, CEO, BankBazaar.com.

As in the case of a home loan, you need proof of identity, proof of income and other documents, such as bank statement for six months, for a plot loan. Besides this, it is advisable to hire a legal advisor to verify the documents pertaining to the plot of land. It is best to verify the original ownership documents, layout drawings of the site, tax receipts for taxes paid by the owner, revenue receipts, and the no encumbrance certificate for the land.

“The property documents include a title deed in the name of the seller, prior title deeds and the encumbrance certificate of last 15 years, all tax receipts paid by the previous owner, location certificate, possession certificate and NOCs, if any. Borrowers will have to produce the original documents in the name of the seller to the bank for legal verification,” says Shetty.

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