This is a common question that everyone thinks about before deciding to buy a home: "Should I invest in a plot or buy a flat or pre-built house?" People have different preferences. If you choose a home loan, it covers only the cost of constructing or buying a house, not for buying a plot. A plot loan, on the other hand, is specifically for buying land, not for building a house. So, the confusion remains about which option to choose. But do you know which might be the better option? Let's find out!
As the name suggests, a plot loan is a loan meant for buying land or a plot. You can use it to build a house or for investment, but you can only use this loan for buying land, which means banks will sanction loans on the basis of land value and not for building or constructing anything else in the land. Also, you need to know that Plot loans are only sanctioned for residential plots.
Did you know? Plot loans are also available to buy industrial plots for any commercial purpose. They are called commercial plot loans.
| Pros | Cons |
|---|---|
| Allows purchasing a plot without immediate construction plans. | Higher Interest Rates compares to home and composite loan |
| Good for those wanting to invest in land for future value appreciation. | Tax benefits will depend on the purpose of the plot. |
| Shorter Tenure upto 15-20 years. |
As we discussed earlier, a plot loan is only for buying land; it does not cover construction costs. On the other hand, a home loan is for buying a ready-to-move-in or under-construction home. The concept of composite loans combines both: they cover the purchase of land and the construction of a house on that land. This option is ideal for those planning to build a home on the purchased plot within a specified timeframe.
| Pros | Cons |
|---|---|
| Single Loan for Two Purposes | Strict Timelines (Usually 1-2 years. If you don’t start constructing the house within the timeline then the lender will increase the interest rate and ask for repayment. |
| Phased Disbursement (Payment will be made in three stages) | Higher Documentation |
| Tax Benefits if you can complete the construction of your house within 3 years. | |
| Competitive interest rate starting from 7.25% |
In a composite loan it’s mandatory to start the construction within 1-2 years. If you fail to do so, the lender will start increasing the interest rate and ask you for repayment.
You will receive the loan amount stepwise not at a once. Generally three steps banks follow to give loan:
Stage 1: When you buy the plot
Stage 2: When you start building the house in the plot
Stage 3: As construction process begins the payment will be released step wise.
You have to present all the details regarding the plot and construction plan such as cost of construction, plot legal documents and many others.
| Feature | Composite Loan | Plot Loan |
|---|---|---|
| Purpose | Covers both plot purchase and construction of a house on the plot | Specifically for purchasing a plot of land |
| Loan Disbursement | Disbursed in phases as construction progresses | Lump sum disbursal for plot purchase |
| Documentation | More extensive documentation due to dual purpose | Generally simpler documentation compared to composite loans |
| Tax Benefits | Eligible for tax benefits on both principal and interest payments | No tax benefits available on the loan |
| Interest Rates | Competitive interest rates | Often higher interest rates compared to composite loans |
| Timeline Requirements | Construction must start within a 1-2 years after purchase | No immediate requirement to start construction |
| Ideal for | Those planning to build a house on the purchased plot | Investors or individuals looking to buy land for future purposes |
When choosing between a composite loan and a plot loan, it's important to think about different things that can affect your decision. Here are some important factors to think about:
Immediate Construction: If you plan to start construction immediately after purchasing the plot, a composite loan is more suitable.
Future Construction or Investment: If you want to buy land for future development or as an investment, a plot loan might be a better option.
Cost of Construction: Consider the total cost, including the plot and construction expenses. Composite loans cover both, providing a comprehensive financing solution.
Down Payment: Both loan types require a down payment. Make sure you have sufficient funds for the down payment and other related costs.
EMI Affordability: Calculate the EMIs for both loan types and assess your repayment capacity. Composite loans may result in higher EMIs due to the combined loan amount.
Loan Tenure: Composite loans generally have longer tenures compared to plot loans, resulting in lower EMIs. Plot loans have shorter tenures, leading to higher EMIs.
Interest Rates: Compare the interest rates for both loan types. Composite loans usually have competitive rates, while plot loans have higher rates.
Documentation: Composite loans require extensive documentation, including construction plans and approvals. Plot loans have simpler documentation requirements.
Approval Process: The approval process for composite loans can be more strict due to the combined financing for the plot and construction.
Deciding between a composite loan and a plot loan depends on what you're ready for now and what you plan for the future. If you want to build right after buying land, go for a composite loan. It covers everything, spreads out payments, and gives tax breaks. But if you're investing in land for later or just want flexibility, a plot loan lets you buy without building right away.
How can EazyBankLoan help you in taking a loan? We understand the process of procuring a loan can be stressful. That is why we take care of your Loan application process, saving you time and hassle by handling the paperwork and communication with the loan providers.
Check the details here at EazyBankLoan
Need help? Reach out at support@eazybankloan.com
A composite loan is a loan that combines the financing for the purchase of a plot and the construction of a house on that plot. It covers both expenses and is disbursed in phases based on construction progress.
A plot loan, also known as a land loan, is a loan specifically for the purchase of a plot of land. It does not cover construction costs and is suitable for those looking to buy land for future development or investment.
Composite loans offer tax benefits on both the principal and interest components under Sections 80C and 24(b) of the Income Tax Act. Plot loans do not provide any tax benefits.
Yes, plot loans generally have higher interest rates compared to home loans and composite loans due to the increased risk for lenders.
Yes, you can switch from a plot loan to a composite loan when you are ready to start construction. However, this will involve refinancing and additional documentation.
No List Founds!
Your email address will not be published. Required fields are marked *
