Investing in land is a crucial step towards investing in your future, whether it’s for your dream home, a long-term investment, or a development project. Securing the right loan for a plot can make this process more accessible and financially manageable. Before applying for a plot purchase loan, having a comprehensive understanding of this type of loan can help you make informed decisions and avoid common pitfalls.
So, before you start the paperwork, here are some key factors you need to know to ensure that you're getting the best possible deal while securing a plot loan.
1. Understand the Type of Loan You Need
When you’re considering a loan for a plot purchase, it’s crucial to understand the various types of land loans available. These loans can vary greatly based on the condition of the land you’re buying. Here are the three main types of loans for plots you should know about:
- Raw Land Loans: For undeveloped land with no utilities or infrastructure, raw land loans are considered high-risk. They typically require higher down payments (20-50%) and come with higher interest rates because of their features.
- Unimproved Land Loans: These loans are for land with basic improvements, like road access, but lacking utilities. They offer slightly better terms than raw land loans and have lower interest rates and down payment requirements.
- Improved Land Loans: For land with essential utilities and infrastructure, improved land loans are closest to traditional mortgages. They offer the most favorable terms, including lower interest rates and smaller down payments, as the land is ready for construction.
When you’re deciding between three loans for plots: raw land with no utilities requiring a 40% down payment and an 8% plot loan interest rate, unimproved land with basic infrastructure at 30% down and 6% interest, and improved land with all utilities and ready for construction at 20% down and 4.5% interest, the improved land loan offers the best terms. The other options may also fit if you're willing to invest in development over time.
2. Loan Eligibility Criteria
Financial institutions evaluate several eligibility criteria to determine whether you qualify for a plot loan and at what interest rate. Although eligibility criteria differ from lender to lender, some common requirements include:
- Age: Minimum 21 years.
- Credit Score:Typically, 650 or higher
- Income:Stable, with proof of income.
- Documents:Proof of identity, residence, and income.
- Land Documents:Clear legal title of the plot.
- Down Payment:Usually 20-40% of the plot value>
- Location:The land must be in a suitable area for development
The loan amount may depend on your income, credit score, and the plot’s value. As a Salaried Professional with a credit score above 825, you can get a loan amount of up to ₹35 Lakh with an interest rate of 9.50% to 10% from PNB Housing. For a Self-Employed Non-Professional (SENP), the plot loan interest rate at PNB Housing may go up marginally, from 9.80% to 10.30% for the given credit score.
3. Loan-to-Value (LTV) Ratio
The Loan-to-Value (LTV) ratio is the percentage of the plot’s value that a lender is willing to finance. For example, if you want to buy a plot worth ₹25,00,000 and the lender offers a 75% LTV ratio, they would finance ₹18,75,000 of the plot’s value. You would need to pay the remaining ₹6,25,000 as a down payment.
A higher LTV means you borrow more, but it also usually comes with higher interest rates. Smaller loans with an LTV ratio of more than 90% may be eligible to get marginally lower rates.
4. Interest Rates and Loan Tenure
The repayments for plot purchase loans vary significantly based on tenure, interest rates, and the type of rate: fixed or floating. A fixed interest rate offers stability with unchanging EMIs, while a floating rate fluctuates with market conditions, potentially reducing costs if rates decline but increasing risk during hikes. Depending on your credit score and your nature of employment (salaried or self-employed), the plot loan interest rate differs. Moreover, the loan tenure affects the EMI, meaning higher EMIs for shorter loan tenures but lower interest amounts in total.
Take the example of Priya. With a 780 credit score, she applied for a loan for a plot at PNB Housing Finance because of their competitive interest rates. For a ₹45,00,000 loan, she has to pay 10.4% interest. A 30-year loan tenure results in an EMI of ₹40,827, with a total interest payable of ₹1,01,97,796 and a total repayment of ₹1,46,97,796.
On the other hand, a shorter 25-year tenure increases EMI to ₹42,167 but significantly reduces interest to ₹81,50,157, lowering the overall payment to ₹1,26,50,157. The longer the tenure, the more interest you'll pay in the long run.
5. Processing Fees and Additional Charges
Processing fees and additional charges for plot purchase loans typically include an application fee, legal charges, and valuation charges. These fees are not included in the main loan amount and account for only a small percentage of the total loan value. The exact charges may vary by lender and the loan's terms. It's important to review the fee structure before applying to ensure there are no hidden costs.
For instance, PNB Housing charges a processing fee on loans for plots, usually set at a rate of about 1% of the loan amount. Besides the processing fee, it includes valuation fees, legal fees, and documentation charges deferring on loan type.
6. Understand the Loan Repayment Terms
When securing a loan for a plot, having a clear understanding of the repayment terms is crucial for managing your finances effectively. Typically, lenders offer flexible loan tenures ranging from 3 to 30 years to give you the flexibility to choose a period that suits your budget. Your monthly EMI (Equated Monthly Installment) will depend on the loan amount, the interest rate, its type, and tenure.
Some lenders also offer a moratorium period, allowing you to delay payments for the initial few months as a relief during the early stages of your project. Check whether the lender offers balloon payments or allows additional payments to reduce principal, saving interest over time.
7. Ensure Clear Property Title and Documents
Before securing a loan for a plot purchase, make sure the property has a clear title and all required documents are in order. For instance, PNB Housing requires key documents to process your loan application, including a duly filled application form with a photograph, age proof (PAN Card, Passport, or a certificate from a statutory authority), and residence proof (such as a Passport, Driving License, or Ration Card). Additionally, you must provide your latest educational qualifications, salary slips for the last three months, and Form 16 for the past two years, amongst other documents.
Your loan application may be rejected if there are any disputes or missing documents. For example, if you apply for a plot loan but the title is unclear, the loan approval might be delayed or denied. Always confirm the legal status of your property beforehand.
8. Impact of Location on Loan Approval
The location of the plot has a significant effect on loan approval. Financial institutions evaluate whether the property is in a developed or emerging area and then decide on the loan approval accordingly.
For instance, urban land has low interest rates and better loan terms, starting from 9.50% for amounts up to ₹35 Lakh. In contrast, plots in rural or remote areas may attract higher interest rates due to lower market demand and potential challenges in selling the land. In some cases, these plots might even be rejected for financing. Always verify the suitability of the location with your lender prior to loan application.
9. Tax Benefits and Government Schemes
Certain tax benefits are available when taking a plot purchase loan for construction. You can claim deductions on principal repaid under Section 80C if the plot is for residential purposes. Additionally, if you're eligible, you may benefit from interest subsidies under government schemes like PMAY (Pradhan Mantri Awas Yojana), which can reduce your financial burden.
If you are looking for a plot loan of ₹30 Lakh, for instance, under PMAY, you might get it at a reduced rate of 8.5%, or you might get an interest subsidy, depending on your income and eligibility. Always consult with a tax professional or your lender to understand the full scope of tax benefits you can avail when financing your plot purchase for construction.
10. Prepayment and Foreclosure Policies
Before you go for a plot purchase loan, you must familiarize yourself with the prepayment and foreclosure policies. Plot loans typically levy no prepayment penalties, and you can lower the overall interest paid over the tenure of the loan by opting for prepayment with PNB Housing.
But if you continue with an existing loan of ₹25 Lakh at 9.75% and want to go for a bulk payment, the prepayment will erase your outstanding principal. Some loans, however, may have penalties for total foreclosures during the first years, so you can clarify these terms with your lender.
Wrapping up
Securing a loan for a plot purchase is a big step that requires careful consideration of various factors. By keeping these essential points in mind and doing thorough research, it is possible to make informed decisions and select the best plot loan option that suits your needs, helping you invest wisely without significant financial burden.
FAQs
What is the maximum loan amount I can get for purchasing a plot?
The maximum loan amount you can get for purchasing a plot depends on several factors, including the lender's policies, your eligibility criteria, and the value of the land you're purchasing. Typically, financial institutions offer loans up to 70-75% of the plot's value (depending on the Loan-to-Value (LTV) ratio).
What are the eligibility criteria for securing a loan to purchase a plot?
You need to be between 21-65 years of age, have a stable income, a credit score of 650 or higher, and be able to pay a down payment of 20-40% of the plot's value. The land must have clear legal documentation, and its location should be suitable for development.
Are there any processing fees or hidden charges?
Yes, there are additional processing fees and other charges, such as valuation and legal fees, which differ from lender to lender.
Can I prepay my plot loan?
PNB Housing allows prepayment without penalties, helping reduce the outstanding principal and overall interest. However, some early repayment terms may vary, so check with the lender.
