Development authorities of various cities regularly come up with plots for residential development for individuals. An ongoing one is by the Jaipur Development Authority for residential plots of different sizes under six schemes, which are open till 2 March 2015 for application. Last year, during September and October, the Haryana Urban Development Authority had offered allotment of freehold residential plots in Palwal and Faridabad. Many municipal authorities and developers take out such schemes.

Buying an apartment is common. But buying a plot of land to build a house on, or for investment, though not common in bigger cities due to lack of availability and very high price, is a trend still seen in smaller cities and towns. Sachin Chaudhary, business head, Indiabulls Housing Finance Ltd, said, “Generally, this percentage of customers (who want to buy plots) is higher in category B and C cities as people residing in these cities prefer individual houses and also land is available. Such people form about 30-35% of potential buyers in small cities and 5-7% in metro cities. In cities such as Mumbai, this is not even 2% due to scarcity of land within city limits.”

Many people, while living and working in bigger cities, plan to settle down in their hometowns, and work towards this goal in advance. Taking a loan to buy a plot and construct a house on it makes this easier to do.

How to go about it?
The process of taking a loan to buy a plot and build a house on it is slightly different from taking a home loan to buy an apartment because of the difference in asset involved. For instance, since loan eligibility is limited, you have to figure out what portion of the money will be used to buy the land, and what portion to build the house. In case of an apartment, the full amount is available to you to buy it; segmentation is not required.

But there is also some flexibility. Say, you had planned to buy a bigger plot to build a house on, and had applied for a loan accordingly. But then you decided to buy a smaller plot. In this case, you will need lesser money for the land, and will have more money to, say, build your house. Let’s take an example. Say, your total loan eligibility as stated by the lender is Rs.60 lakh. Out of this amount, you had initially decided to buy a plot for Rs.45 lakh and spend the remaining Rs.15 lakh on the house. But you changed your mind and decided to buy a plot for Rs.40 lakh or lesser, and spend more on the house. This facility to alter how much you spend on what within the amount given on loan makes the terms more flexible.

If you were buying an apartment instead, this type of flexibility is limited.

However, do keep in mind the applicable loan-to-value (LTV) ratio on the loan against both plot and construction.

Typically, lending institutions disburse the loan amount in tranches. “These composite loans are first disbursed for acquisition of the residential plot and then the balance disbursal happens for construction of a house on that plot according to the progress in construction,” said Chaudhary.
You may be asked to submit certain documents for approval of the loan, such as proof of income, past six months’ bank statements showing repayment of any ongoing loans, and so on. Besides personal documents, you will also have to furnish other documents related to the property that you intend to buy—allotment letter of the development authority, copy of approved drawings of proposed purchase, agreement for sale, title deeds, including the previous chain of the property documents in resale cases, and so on. Besides that, “the customer has to submit the title documents of the plot in original and a map approved by the authority concerned, along with an estimate amount needed for construction,” added Chaudhary.

In case of loan for construction of house, copy of the building plans, approved by the local authorities, and construction estimate by an architect or a civil engineer become very important as the lending institution will approve the loan based on these estimates. Also, one must remember that after taking a loan to buy a plot, the construction of the house on it has to start within the time period mentioned in the loan agreement. For instance, if you take a home loan from State Bank of India, the construction of the house has to commence within two years from the date of availing the loan. “If you do not start the construction of house within the stipulated time, lender may increase the interest rate on outstanding loan. Rate of interest may go up to as high as 13-14% per annum,” said Rishi Mehra, founder, Deals4loans.com. Some lending institutions, such as ICICI Bank, want the construction to be completed within two years of the first disbursement.

Loan eligibility
Similar to any other reason to borrow, how much loan you can avail depends on your income and credit profile. “The loan amount eligibility will depend on the repayment capacity, which is based on monthly income, savings history, number of dependants in the family, spouse’s income, and other such factors,” said a spokesperson of HDFC Ltd in an emailed response.

Besides these, the total amount of loan that you can take also depends on the value of the plot and what it will cost to construct the house. “The LTV ratio is generally 75% for plot acquisition. For composite loans for plot purchase and construction, the overall LTV is as per normal housing loans, i.e., it goes up to 85% LTV for ticket size of up to Rs.20 lakh, 80% LTV for up to Rs.75 lakh, and 75% LTV for loan amount above Rs.75 lakh,” said Chaudhary.

With HDFC, for instance, LTV for buying a plot is up to 70% of the land cost and the tenor is up to 15 years; for construction, the LTV is up to 80% of the cost of construction and tenor is up to 20 years.

LTV ratio signifies that out of the total property value, how much the lender will finance and how much you have to contribute from your pocket. So, if the LTV ratio is 75% against a property value of Rs.50 lakh, you will get a loan of only Rs.37.5 lakh, and the remaining Rs.12.5 lakh has to come from you.

Interest rate
Loans to buy plot and then build a house come under the umbrella of home loans. Interest rates, too, are typically the same as for loans taken to buy an apartment, and vary across banks and other lending institutions. Interest rate will also depend on various factors such as type of loan (floating or fixed), tenor, amount, loan seeker’s payment history, location of the plot, and others. Rules regarding prepayment, delays, change of interest rate, and others, are the same as those for buying an apartment. Tax deduction rules on repayment of home loan is also similar.

Mint Money take
For those who can take the extra burden of getting a house constructed, buying a plot is a good option. It gives you the flexibility to construct a house according to your needs. It also allows you to build in phases; you can construct one floor now, and more later as per your needs or availability of money. For the further expansion or improvement, you can again avail an additional loan for the purpose.

However, initially, while looking for plot, consider those that are within municipal limits of the city or one on offer by an authorized agency. Also, having a pre-approved loan sanction letter from the lending institution will help. Make sure you are aware of the terms and conditions related to loan agreement—for example, by when you need to start the construction or complete it. Remember that tax deductions against repayment of home loan will be applicable only from the year in which the construction is completed.



- by Ashwini Kumar Sharma

Source :- LiveMint