Applying for a land purchase loan? Here are five things to keep in mind
Many people consider ownership of a plot of land to be the best form of investment. Land values rarely fall and generally appreciate quite steadily. Moreover, say you want to build your own house or office. The first step is to buy your own plot of land. But with land prices being so high, the best option for most people is to take a land purchase loan. In most places, the land price appreciation rate may be higher than your land purchase loan rates. So, it makes sound economic sense to buy your plot of land with a plot loan.
Dr Chaturvedi, a urologist based in Delhi, wanted to build a house. The first floor would double up as a clinic for his practice. He scouted the outskirts of Delhi for an ideal piece of land. Ultimately, he found one in Dwarka. He could afford to buy the land outright. But he decided to hold on to his savings and applied for a land purchase loan. After his plot loan was approved, he acquired the land and began planning for his compound.
If you too wish to get a plot loan, here are a few points you should consider before applying.
- Types of land or plot
There are several types of land or plot, each intended for a separate purpose. Types of land or plot include residential plot, industrial plot, and agricultural land, among others. Home loans can be taken for all kinds of properties. But plot loans are generally only available for residential land.
- Geographic limitation
Another factor to consider is the geographic limitation of plot loans. When selecting a plot for purchase, remember this: Your plot loan will only cover plots located within the respective municipality or corporation. Areas located in villages or on city borders may not be feasible if you want to buy them with a loan.
The maximum tenure for a land purchase loan is generally shorter than the maximum tenure for home loans. Home loans can stretch up to 30 years. In contrast, plot loans last for no more than 15–20 years. When deciding your tenure, you might be tempted to take a short one so that you can pay out your loan quickly. Before you do that, consider whether you have a specific need to become loan-free quickly—for example, if you want to apply for another big loan soon. If not, you should go for as long a tenure as possible.
- Rate of interest
Land purchase loan rates can be somewhat higher than the rate of interest for home loans or construction loans. Being directly linked with various economic factors, they are also much less negotiable. If offered a choice between a fixed and a floating rate of interest, it may be wiser to go for fixed. This is because trends imply that land purchase loan rates are more likely to rise than fall in the future.
- Purpose of purchase
Are you planning to buy a piece of land for investment or self-use? Do you want to build your own house on it or build a residential complex for others on it? Or do you just plan to hold on to it for value appreciation and resale? These factors can play a role in the loan pricing. Building on the purchased land gives the lender more security. That is why it typically attracts a lower rate of interest.
- Lender’s risk
Another important thing to consider is the lenders’ view on risk aspects. The lender will consider several factors to determine the risk profile of a loan application. This would include purpose of land purchase (investment or self-use), construction timeline (a shorter timeline is less risk for the lender), and existing loans.
Keep these factors in mind when you go looking for a loan to fund your own plot of land.