5 things to know about plot loans in India

Are you about to apply for a plot loan? You should read this article before you do.

Has it always been your dream to build a pretty little house on a plot of land that you own? You might borrow a plot loan to buy the land – but do brush up on some important facts first.

1 The plot loan does not get income tax benefits.

The most common misconception among loan borrowers is that the plot loan is a home loan. It is not – and hence, it is not liable for the same tax benefits that a home loan gets. You cannot claim pre-EMI interest on the interest you pay on the loan before construction of the house is completed, either.

2 There is a commencement clause in the loan.

The plot loan is granted subject to the proviso that you will begin construction on the land not later than two years (or one year, depending on the lender’s policy) after date of loan disbursal. In fact, you are required to submit a timeline and detailed schedule of construction drawn by your architect/engineer at the time of applying for this category of loan. Failing to commence construction can result in two eventualities:

  • The lender may charge a higher rate of interest (up to 2% higher) than the interest being charged since EMI payments commence, or
  • The lender may ask you to pay the balance outstanding amount and close the loan forthwith.

3 The plot loan has a lower LTV than home purchase loans.

Since the plot loan is not a home purchase loan, its LTV (Loan To Value) is also different. The LTV for home purchase loans is normally up to 80% of the house’s value, or up to 90% for borrowings equal to or lower than Rs 25 lakh. However, the LTV for the plot loan is not more than 70% in most cases, so you should factor this in while examining your finances to make the plot purchase.

4 The lender may charge foreclosure fees for early repayment.

Only home loans in India are not charged pre-payment or foreclosure charges, all other loans are. Accordingly, you will be charged some foreclosure fees for closing the loan before its total tenure is up. Find out the foreclosure charges at the time of signing up for the plot loan.

5 The evaluation of the documents may take longer before disbursement.

The evaluation of papers takes a different turn as compared to that for home purchase or commercial property loans. In the plot loan, the lending institution must check the plot’s credentials for reservation (whether agricultural or non-agricultural), if the reservation has been changed by previous owner and why, if there are any encroachments made on the plot or if the plot has encroached outside its marked limits, if there are any legal claims or ongoing litigation regarding the land, etc. This process may take a little longer in case of plot loans.

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