Mumbai: After staying in company-provided flats in metro cities all your life, you are looking forward to shifting to your hometown after retirement. You don't mind staying in a flat but there are no projects by reputed builders where you can buy a property. You have an option, to buy a residential plot and build your own house.
While home loans are easily available for salaried employees, what about a loan to buy a residential plot? Plot loans are also available without too much difficulty and, in most cases, at the same rates as a home loan. But other terms and conditions could be different. It requires some planning.
Features of plot loan
The basic difference is in the end-use. The plot loan is for purchase of a piece of land for a residential purpose, unlike a home loan which is for the purchase or construction of a house. The Loan to Value (LTV) for a plot loan could be lower than in a home loan. LTV is the ratio of the loan to the value of the property, in this case the residential plot.
BUYING A PLOT WITH A LOAN
Rate of interest might be higher in case of plot loan, while LTV might be lower than home loan
Tenure could also be lower than home loan
If construction does not start within stipulated period, bank may recall the loan or increase the rate of interest
Prepayment may attract charges if done within a certain period of availing the loan or if house is not constructed
Plots require more due-diligence than ready property
Buying developed plot is safer than standalone one
In a home loan for buying or construction of property, lenders offer up to 85 per cent of the property value. In a loan for a plot, the LTV could be lower, at 60-75 per cent. The tenure could also be lower. For instance, in a home loan, lenders are willing to give loans up to 30 years. For plot loans, it is between five and 15 years.
As with home loans, both floating rate and fixed rate options are available for plot loans. Lenders such as ICICI Bank, State Bank of India (SBI), Housing Development Finance Corporation (HDFC) and PNB Housing offer plot loans at the same rates as home loans. Some lenders charge a higher rate on plot loans but this is case and profile dependent.
However, don't buy the plot if you don't intend to construct your house soon. Borrowers must complete construction of the house within the time frame stipulated by the local authority or as specified by the bank, whichever is earlier. For example, SBI requires that construction begin within two years of availing the loan.
Gaurav Gupta, founder and head of MyLoanCare.in, says: "Banks don't lend for the purpose of buying just land (other than a plot for building a house), as this is treated as a speculative activity. In case construction is not completed in the stipulated period, banks may increase the rate of interest by one to two per cent or even recall the loan completely."
Borrowers can avail of tax exemption on a plot loan only after completion of construction. No tax benefit can be claimed for the period before completion, unlike a home loan where interest charged during the under-construction period can be claimed in five years, post completion, subject to the overall limit.
"Borrowers must ensure that they construct the houses as per building plan only. Any non-compoundable deviations may lead to difficulty in availing fresh loans later. Secondly, once the construction is completed, remember to submit copies of the completion certificate or occupation certificate to the bank so that the plot loan can be converted into regular home loan and borrower can avail income tax benefit," Gupta points out.
Prepayment or foreclosure
Floating rate home loans are exempt from prepayment charges by the Reserve Bank of India and National Housing Bank. However, some banks and housing finance companies have taken a view that plot loans are not included in this definition of a home loan and they may apply foreclosure charges in such cases. Customers must take a written clarification from the bank/housing finance company on this matter while availing the loan, says Gupta.
With HDFC, too, there are conditions with regard to prepayment, says Renu Sud Karnad, managing director. In case of plot loans to self-employed persons, there are no prepayment charges if done within three years from the date of first disbursement. Those made after three years from this date shall bear a prepayment charge of two per cent, plus applicable taxes, of the amounts being so paid if the house is not constructed, HDFC says on its website. In case of salaried borrowers, no prepayment charges shall be payable on account of part or full prepayments. This is also the case with other HFCs.
As with a regular home loan, lenders will check borrowers' repayment capacity, which is based on monthly income, savings history, number of dependents in the family and spouse's income, if any, says Karnad.
In addition, while applying for a plot loan, borrowers need to present documents such as the copies of the allotment letter, approved drawings of proposed purchase, agreement for sale/sale deed from architect/engineer for the property to be purchased, and title deeds, including the previous chain of the property documents in resale cases.
For converted properties (change of land use, etc), banks check whether conversion charges and development charges have been paid. Non-availability of these may result in your application being rejected, despite your being eligible with regard to income and repayment criteria, says Gupta.
Unlike a built property, due diligence in case of a plot is more complex because land records are not digitised and buyers will have to refer to manual records, says Ashuthosh Limaye, head of research at Jones Lang LaSalle India. Buyers must check if the land ownership is single or joint or if family-owned. If so, does the seller have the right to sell or can any other family member claim the land? Some other factors include compliance with land use, reservation - if it is no development or not, Floor Space Index restriction and so on.
A safer option is to buy a developed plot - residential ones with infrastructure like water, sewer, electricity and loans. Buyers can buy these from developers and construct their own houses. "Banks treat such cases as approved project funding and check the title and licence details of the builder," says Gupta.
Buying a residential plot might not be possible in metro cities, where land prices are very high. But in towns like Nagpur, Aurangabad, Kanpur, Mangaluru, Bhopal, Vizag, Vijayawada, etc, developed plots are as easily available as residential flats. Some developers who offer developed plots are DLF, Unitech, BPTP, Vipul, Raheja, Aditya and Sobha.
"In smaller cities, land is relatively less expensive. So, many buyers prefer to buy plots and construct their own houses. But buying a standalone plot is riskier. Not only because of the due-diligence, but because you might also have to protect it from encroachment. Guarding it, especially if it is another town, can be difficult," says Limaye.