Plot Loan or Flat Loan: Which is a better option?

With financial year drawing to a close, it is time for you to start finalizing your investment choices if you have not already done so. With multiple investment options on offer, you must consider various factors such as tax benefits, expected returns, lock-in period, and more before making a choice. Out of the multiple options available in the market, investment in a residential property is always a popular option with investors. Though, due to the high prices of residential properties, you might not be able to make an outright purchase and need to avail of a loan.

The type of loan you avail depends on the kind of property you want to purchase. If you are contemplating buying a built-up property, you can apply for a Flat Loan or Home Loan, and if you want to buy a vacant piece of land, you must get a Plot Loan.

What is Flat Loan?

A Flat Loan is a type of home loan that is offered to prospective homeowners who are looking to purchase an already constructed flat or builder floor.  It can also be availed for an apartment or floor that is under construction. A flat loan can also be classified as a regular Home Loan because all its features and benefits are similar to that of a Home Loan. Flat Loans are offered by lenders offering Home Loans.

What is a Plot Loan?

Plot Loan is a category of Home Loans offered to borrowers looking out to purchase a vacant plot of land that can be developed for a residential purpose. Due to higher risk associated with a Plot Loan, not all financial institutions offer this facility. While some of the features of a Plot Loan are the same as a regular Home Loan but many features are quite different. It is a suitable option for borrowers who wish to construct their home on a plot as per their requirements.

Flat Loan vs. Plot Loan

Now, that you are faced with a conundrum regarding the suitability of these loans for financing your property, here is a comparative analysis for your perusal:

• Loan to Value Ratio: This is an extremely important ratio that helps determine the maximum amount you can avail as a loan. For a Flat Loan, LTV ratio can go up to 90% of the value of the property for loans of up to Rs. 30 Lakhs while in case of a Plot Loan, the LTV ratio could go up to a maximum of 80% of the value of the property if the plot is located in a city; and up to 70% if the plot is located outside the city limits. The difference in the LTV ratio is due to the higher risk associated with a Plot Loan.
• Interest rates: Interest rates applicable against a Flat Loan are comparatively lower as compared to Plot Loans. Again, the difference in interest rate is due to the higher perceived risk by the lender while lending for the purchase of a plot of land. For instance, HDFC Home Loan Interest Rates start from 8.00% per annum and can go up to 8.80% per annum. But the HDFC Plot Loan interest rates start from 8.15% and can go up to 9.05%.
• Repayment Tenor: Having flexibility in terms of repayment tenor is essential to get an EMI amount that you can easily afford. While in case of a Flat Loan, the maximum repayment tenor can stretch up to 30 years, in case of a Plot Loan, it is capped at 15 years.

For example, while the maximum repayment tenor for an SBI Home Loan/ Flat Loan is 30 years, the maximum repayment tenor for an SBI Plot Loan is 10 years only.

• Usage and availability: A Flat Loan can be used to purchase an already constructed or under-construction property. Though a Plot Loan can only be availed for purchasing a vacant plot of land. Moreover, almost all financial institutions offering Home Loans also offer Flat Loans, but Plot Loans are available only from selected lenders.
• Tax benefits: You can avail Income Tax benefits under Sec 80C and Sec 24 (B) of the Income Tax Act 1961 against repayment of a Flat Loan. Though, these benefits are not applicable in the case of a Plot Loan. You can only claim Income Tax benefits against the amount borrowed for construction on the purchased plot.
• Foreclosure charges: When you avail of a Flat Loan with a floating interest rate structure, you need not pay any charges while foreclosing the loan. But in case of a Plot Loan, repayment of the loan should be as per the loan schedule, or a foreclosure charge will be levied on pre-paying your Home Loan. These charges can vary between 2% to 5% of the principal outstanding on the date of foreclosure.

It is thus evident that a Flat Loan enjoys various benefits over a Plot Loan. However, the final decision depends entirely on the category of the asset purchased along with the end-use.

Also Read: Independent House Property or an Apartment in a Society: Which one is Best?

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