How are home loans and home construction loans different?

Finances are the first step towards real estate investment, be it home buying or home building. However, a common confusion for home finance borrowers are the terms home loan and home construction loan.

 

See also: What is processing fee in home loan?

 

Differences between home loan and home construction loan

Home loan

A home loan is given for property purchase. This may be under-construction, resale or ready-to-move-in property. In this case, a person is only investing in the property and is not related to its construction.

Types of home loan

Home loan is available at fixed and floating rate of interest.

Home loan interest rates

Home loan has lower interest rates than home construction loan. Home loan starts with an interest rate of around 8%.

Home loan documents

All property-related documents, including sale agreement and title deed, are required along with personal identification and income proof documents.

Home loan application process

You can apply for a home loan by filling out an online or offline form. Once submitted with all the required documents, the home loan lender will conduct due diligence and approve the home loan amount.

Home loan tenure

These are high-value loans with a tenure of 30-40 years.

Home loan disbursement

The home loan borrower is given the entire amount when the home loan is sanctioned.

Home loan repayment

You can start the repayment from the time you avail the home loan. Repayment includes EMI and other associated charges.

 

Home construction loan

A home construction loan is given to borrowers who want to construct their house. This will include constructing an independent house on a piece of land or extensive renovation of your property.

Types of home construction loan

One-time closure: This is a single-time closure loan that includes all aspects of building construction. A mortgage of the constructed building is the security deposit of this loan.

Two-time closure: This loan gives you the flexibility of a two-time closure. You can start by getting a short-period loan for construction and it can be refinanced by mortgaging the fully constructed building for a longer time.

Home construction loan interest rates

Home construction loan interest rates range between 10-14% as very few lenders offer this financial product.

Home construction loan documents

Property documents, construction plans, permission from the authorities and cost estimates must be submitted for availing of home construction loans. Personal identification and income proof documents, too, are required.

Home construction loan application

Home construction loan is not easily available online as it involves extensive documentation. Not all banks/lenders offer home construction loans and they may have eligibility criteria. Start by evaluating vendors before proceeding with the application.

Home construction loan tenure

These are short-term loans and have a tenure of 7-15 years.

Home construction loan disbursement

The home construction loan is disbursed in stages based on the construction status.

Home construction loan repayment

During construction, a home construction loan borrower will pay interest on the amount. Once the construction is complete, the borrower has to pay the principal plus interest.

 

FAQs

Can I use a home loan for construction?

Home loan is for investing in under-construction, resale or ready-to-move-in property. For construction, you have to use a home construction loan.

Can I take a home loan and not build a home?

If you have taken a home loan and have postponed the construction, it will be an expensive deal for you will pay a high interest. Avail the home loan or home construction loan only when you are looking to invest or construct.

What are the benefits of a home construction loan?

An important benefit is that the money is disbursed in phases and a borrower has to pay interest only on the amount that has been disbursed for construction.

How does a home loan work for under-construction property?

A home loan for an under-construction property is given according to milestones. A borrower will get the parts of the loan whenever the builder demands. Some lenders may charge interest only on the money disbursed, which is financially helpful for the home loan borrower.

How much market value can you get as a home construction loan?

You can get a loan of up to 90% of market value under home construction loans.

Is a construction loan eligible for tax exemption?

Yes, a construction loan is eligible for tax exemption under section 80 (c), 80EE and section 24 (b) of the Income-Tax Act.

Who cannot take a home loan?

People who are approaching retirement find it difficult to get a home loan as there are fewer working years to repay the home loan.

Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at [email protected]