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3-min read

No home loan just for land purchase

Explore all options to decide the appropriate housing loan.

Abitha Deepak |

Updated:March 21, 2009, 11:14 AM IST
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No home loan just for land purchase
Explore all options to decide the appropriate housing loan.

There are many options available if you want to take a loan to buy a land. We explore all these options and help you decide which is appropriate for you and why.

I'm a salaried individual from Pune. I earn a net income of approx Rs 50,000 pm. I want to buy a land in my native place (but I may not build a house there) for approx Rs 450,000.

Should I go for a personal loan or a housing loan? I can pay a monthly EMI of Rs 10,000.

You could opt for a personal loan if you want to buy a land. Banks, usually, expect you to state your reasons for purchasing a land. They offer land loans only for construction of homes (ie, a loan to buy a land plus to build a house on it). This is to discourage speculative investments. Not all housing finance companies readily provide a land loan as there is extensive documentation involved, and there is also this danger of land encroachments.

There are a few pros and cons in going for a personal loan.

Pros

1. A personal loan can be obtained for any purpose with no collateral, guarantor or security

2. The loan is usually processed in a week's time with minimal documentation.

Cons

1. It comes with very high interest rates.

2. You will not get any tax benefits unlike home loan which comes under Section 80 C and Section 24.

What’s my EMI?

Stick to these two simple steps to keep your EMI to around Rs 10,000 per month.

Step 1: Choose a personal loan with an interest rate of around 15 per cent to repay a loan of Rs 450,000 in five years

Step 2: Figure the pattern of money outflow with your EMI payments from an amortization table that the bank will provide you, when the loan is sanctioned.

With this you are equipped to decide your outflow every month.

Note: Make sure your EMI does not exceed 40 to 50 per cent of your monthly income.

What are my other options?

1. Top up option

In a housing loan, you have the option of taking a top up loan for the actual construction of the house. You can repay these loans simultaneously. Features of this loan:

1. The maximum repayment period for this loan ranges between 20 and 25 years.

2. You can borrow upto around Rs 1 crore. (Of course it depends on your credit profile, your income, your repayment capacity etc.)

2. Others

You can use investments you have made so far, such as shares, securities, fixed deposits, insurance policies, PPF, gold etc to avail a loan. You can pledge these as collateral to obtain a loan against them.

For instance, you can get a loan against the surrender value of your life insurance policy from the insurance company or from a bank. You can also get a loan from your provident fund account if you have had an employee provident fund account for more than five years. The interest rates would definitely be lower compared to the personal loan interest rates as it becomes a secured loan.

3. Loan on future rent recievables also an option

You can go for this loan if you have a house or commercial establishment that you plan to let out for rent. Banks will require the rental agreement you have signed with the tenant. If the tenant is an MNC, a bank or any other reputable corporate, most banks readily process this loan. Some banks would also provide a loan based on your credit worthiness.

You can get a loan for the future rent that could be received on this property for upto around 80 per cent of the rent for the consecutive eight years. This criterion again varies according to the bank you take the loan from. The rent received on a monthly basis can be paid as the EMI for this loan.

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