Traditionally, Indians have always preferred to buy a piece of land they can later develop into a residential property. To cater to the distinct need of such aspiring homeowners, lenders extend two popular types of home loans – plot purchase loan and home construction loans.
So, if you plan to construct a house, you may face a dilemma — whether to take a loan to buy a plot or avail of a new home construction loan. But we have you covered.
In this blog, we will help you choose between a loan for a plot purchase and a construction loan. We will also explore their features and differences so you can make the right decision and own the house of your dreams.
What is a residential construction loan?
As the name suggests, a home or residential construction loan gets you funds to develop a land into a house or finalise an under-construction building. You cannot use this loan for purposes other than paying for construction-related expenses.
Features of a home construction loan
Here are some distinct features of a home construction loan:
1. Incremental loan disbursal
When you avail of a home construction loan, lenders disburse the loan amount in instalments instead of disbursing funds in one go. The lender may assess the progress of construction and release instalments accordingly.
2. High loan amount eligibility
Residential construction loans offer the advantage of getting maximum loan amount as they have a higher loan-to-value ratio (LTV). Depending on the lender and your creditworthiness, you will be eligible to get up to 90% of the construction value of the home so you can make the most of it.
3. Interest-only monthly instalments
Lenders often require borrowers to first pay EMI to cover the interest on the home construction loan. And once you repay the interest portion of the loan in full, you can begin repaying the principal loan amount.
4. Flexible loan tenure
Depending on your credit history and loan amount, lenders can offer you a repayment tenure of up to 30 years.
What is a plot purchase loan?
A plot purchase loan, also called a land loan, helps you finance your purchase of a piece of land. You can only use the funds to purchase a plot, not for construction, renovation, or home extension.
Common features of plot purchase loans
The main difference between a plot purchase and a construction loan is in the specified usage of funds. But a plot purchase loan has the following distinct features as well:
1. Flexible tenure
Plot purchase loans have a tenure similar to that of construction loans. You can easily secure a repayment tenure of up to 30 years, depending on your loan amount and creditworthiness.
2. Decent loan amount eligibility
These loans have a slightly lower LTV ratio compared to home construction loans. If you plan to purchase land using a loan, you can easily get a plot purchase loan of up to 75% of the plot’s market value.
3. Easier approval of construction loan
Getting a plot purchase loan can be advantageous if you repay the loan in full without delay. That is because your existing lender may pre-approve your home construction loan in future due to trust and past relationships.
NBFCs such as Tata Capital even offer plot plus construction loans, which allow borrowers to fund the purchase of land and construction without needing two separate loans.
4. Immediate fund disbursal
While residential construction loans come with incremental fund disbursal, loans to buy plots give you funds instantly upon approval. So, you can pay for the land in full and secure the ownership of the property without delay.
If you take a plot plus construction loans, lenders may release funds in phases. First, you will receive funds for purchasing the land, then for the construction.
Head-to-head comparison between loan for a plot purchase and construction loan
Parameters
Home construction loan
Plot purchase loan
Loan amount eligibility
Rs 5 lakhs to Rs 5 crores.
Up to Rs 5 crores.
Loan-to-value ratio
Up to 90% of the construction cost.
Up to 75% of the land’s market value.
Repayment tenure
Between 5 years to 30 years.
Up to 30 years.
Fund disbursal
Incremental fund disbursal.
Lump sum fund disbursal.
Purpose
Single-purpose loan meant to finance construction-related expenses.
Single-purpose loan to finance the purchase of a land.
Choosing between a plot purchase and a construction loan
Now that you have seen the differences and similarities between a plot purchase and a construction loan, which one should you choose? The answer is quite straightforward than it seems.
A home construction loan is best if you own a plot or an under-construction property. You can easily secure a loan of up to 90% of the total construction cost and get your dream house constructed without any hassle.
However, a plot purchase loan is a better choice if you do not own land or a house but plan to start your home ownership journey from scratch. You get the entire loan amount at once, so you can fully settle the land purchase without delay.
Besides, you can also avail of plot plus construction loans from select lenders and NBFCs in the country. For instance, if you want to buy land and plan to begin construction in the near future, you can avail a plot plus construction home loan.
This way, you get one loan for purchasing a plot and paying for the construction. Moreover, since you apply for only one loan, you save on interest payments, processing fees, and other miscellaneous expenses.
Construct your dream house with Tata Capital
That was all for our comparison of plot purchase and construction loan. Now that you are one step closer to owning a house, the next decision is to choose the right finance partner for your journey ahead.
At Tata Capital, we offer home loans tailored to your housing needs. Whether you need a construction loan, land loan, or plot plus construction loan, we offer home loans of up to Rs 5 cores with flexible tenures of 5 to 30 years.
Furthermore, with our quick processing process and instant loan approval, you can build your dream house without delay. Visit our website to know more.
06 September 2024
6 mins read
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