Land purchase loans: From interest rates to eligibility; all you need to know

Land is an asset that most people want to own. But with land costs soaring across the country, buying residential plots has become a tough task, especially in the metros and tier-1 cities. With land purchase loans, you can buy residential plots without stretching your finances too much. A land purchase loan has a lot of similarities with home loans but comes with its own set of conditions. Here is a quick guide on land purchase loans, interest rates, eligibility criteria and other important information.

What is a land purchase loan?

A land or plot purchase loan, like home loans, is a secured loan. The loan is specifically offered by banks and NBFCs (Non-banking Finance Companies) for land or plot purchase that can be used to construct a house in the future. Though they have a lot in common with home loans, there are certain differences.

Interest rates of land purchase loans will be slightly higher than home loans and the tenure will be lower. As a result, EMIs (Equated Monthly Instalments) on such loans will be usually higher. Interest rates start at 8.6% and can go up to 17% per annum on a reducing balance basis. You can get a loan with a tenure of as low as five years and this can go up to 20 years.

How much amount can you get as a loan?

The loan amount varies with each lender. But banks and NBFCs usually finance only up to 60%-80% of the value of the property. So, you have to be prepared to finance 20%-40% of the land’s value from your own resources. The loan amount starts from ₹25 lakh and can go up to ₹15 crore depending on the location of the land, borrower’s credit score and history and repayment capacity.

Lenders also evaluate various other parameters of the borrower including age, stability and continuity of income, number of dependents in the family, value of assets owned, her/his liabilities and educational background before sanctioning the loan. Most lenders require you to mortgage the residential site proposed to be purchased as a security for the loan. They also insist on a suitable co-obligation/personal guarantee of adequate net worth.

What are the eligibility criteria?

The eligibility criteria for a land purchase loan is similar to a home loan. The borrower should be between 21 years and 65 years of age and have a stable income. Here are some of the common eligibility conditions and documents that banks and NBFCs insist on before approving the loan.

• Applicant must be either salaried or self-employed
• Salaried individuals should have a minimum income of ₹10,000 per month but it varies with each lender
• Self-employed individuals must present a minimum business income of ₹2 Lakh per annum. This condition also varies with each lender
• Applicant should have a good credit score

Documents required

• Proof of Identity (Aadhaar/Passport / Voter ID card/ Driving License/PAN Card)
• Address Proof (Ration Card/ Electricity Bill/ Lease Agreement/ Passport/Trade Licence/Sales Tax Certificate)
• Bank Statement (latest six months)
• Latest IT Assessment for businessmen/professionals
• Land Tax Receipt
• Title Deed
• Legal scrutiny report from bank’s ‘Panel Advocate’
• Allotment letter or any other evidence showing purchase/allotment of sites issued by development authorities.
• Any other documents as required by the bank

Do these loans come with any conditions?

Some lenders provide these loans only on the assurance that a house will be constructed within a specified period. They usually stipulate that the construction should be completed within three years from the date the loan has been sanctioned/disbursed. Lenders also get an undertaking that construction on the plot will begin at a certain time, which is usually 18 months from the date of disbursal of the loan. The undertaking will be part of the loan agreement.

The bank/NBFC will demand proof, which includes photographs of the building and architect’s certificate, to assess the progress of the construction. A valuation team from the bank/NBFC will visit the site to know the real progress. If the borrower is unable to complete the construction within the specified timeframe, the lender can demand the repayment of the entire loan before maturity. The borrower will then have to foreclose the loan and pay the necessary charges. Instead of closing the loan, the bank/NBFC can also increase the interest on the loan citing the delay in construction.

The land should be residential in nature and has to be within the location limits of the city, corporation or municipality. The plot should not be located in a rural area or industrial area and must not be designated as an agricultural land. The land should also not have any commercial constructions. The plots should also have the necessary approvals from statutory authorities.

So, who can take land purchase loans?

It entirely depends on your actual requirements and financial goals. If you plan to construct a house on the purchased land, a home loan will be ideal since it enables you to get the necessary finance to cover both the land purchase and construction costs. You can opt for a home loan if you are looking at taking immediate possession of the property.

If you are keen on saving taxes, land purchase loans will not give you any immediate benefits. You can get tax deductions only if you add land purchase loans to your home loans and take possession of the property.

But if your main objective is investment in nature wherein you plan to sell the land much later, a land purchase loan would be more appropriate as you can acquire the property without exhausting your existing funds.

Allirajan M is a journalist with over two decades of experience. He has worked with several leading media organisations in the country and has been writing on mutual funds for nearly 16 years.