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21-Jun-2023 | Home Construction Loan
In India, every family shares a common
aspiration—to reside in their ideal abode. Nonetheless, the soaring costs of
real estate make it exceedingly challenging for individuals to afford a
residential property solely through their own means.
To assist people in achieving their
property dreams, financial institutions such as banks and non-banking finance
companies offer two distinct loan options: home loans and home construction
loans. Both these loan products extend considerable financial aid to individuals
seeking to purchase a home.
However, it is essential to understand the
key differences between these two loan types, as well as the notable
characteristics, eligibility criteria, and loan classifications that should be
taken into account. This informative piece addresses all of these questions and
more.
Difference
between Home Loan and Home Construction Loan
In today's times, attaining homeownership
has become relatively simple. Regardless of the type of residence you desire to
purchase, acquiring the necessary funds can be achieved through obtaining a
home loan. Numerous banks and housing finance companies offer a range of home
loan options.
Whether your preference lies in purchasing
a ready-to-move-in apartment, an under-construction property, constructing a
house on a plot of land, or renovating your existing home, you can discover the
ideal home loan that suits your requirements.
However, many borrowers often find themselves perplexed when it comes to distinguishing between a home loan and a home construction loan. Despite their apparent similarities, there exist several differences that borrowers must carefully consider when selecting the appropriate type of home loan.
Distinguishing Features
between Home Loans and Home Construction Loans
Documentation
Requirements
When applying for a home loan, the documentation process is relatively simpler compared to that of a home construction loan.
| Home Loan | Home Construction Loan |
Applicants need to provide essential KYC
documents, income proof, and property papers for verification. | In addition to KYC documents, income proof,
and property papers for verification, applicants must submit additional
paperwork. These may include legal authorization for
the plot from local authorities, approval from the municipal corporation, a
blueprint of the proposed construction by an authorized architect or civil
engineer, property tax papers, and more. |
Maximum
Loan Tenure
Loan
tenure refers to the time given to repay the loan amount along with interest. A
longer tenure means smaller monthly EMIs, while a shorter tenure requires
larger EMIs, potentially limiting the available monthly budget.
| Home Loan | Home Construction Loan |
| The
maximum repayment tenure for home loans is typically up to 30 years, allowing
borrowers ample time to repay the loan amount. | The
maximum repayment tenure for home construction loans is usually up to 30 years
and the rest depends on the lender. |
Interest Rates
| Home Loan | Home Construction Loan |
| With numerous banks, NBFCs, and HFCs offering home loans, the interest rates are highly competitive. However, the rate charged depends significantly on the borrower's eligibility. A good credit history can result in lower interest rates for home loans. | Construction loans in comparison with home loans are available at slightly higher interest rates. |
Approved Loan Amount
| Home Loan | Home Construction Loan |
| When
purchasing a property, borrowers can receive up to 70-80% of the property value
as the loan amount. | Since
the property is yet to be constructed, lenders offer up to 50% or 70% of the
total estimated construction cost as the loan amount. |
Loan Sanction and Disbursement
| Home Loan | Home Construction Loan |
Once approved, the sanctioned amount is
transferred directly to the borrower's bank account. The entire loan amount is
received in one installment. | The
loan amount is disbursed in multiple installments. It typically takes three to
five payments to receive the full amount. These installments are scheduled
according to the different construction phases. |
Tax
Benefits
| Home
Loan | Construction
Loan |
Home Loan offers option of tax saving to the borrower. The Interest and principal paid on home loan is eligible for deduction while computation tax liability. For first time borrower of home loan additional deduction of interest is also available to the extent prescribed under Income-tax Act, 1961. Home loan availed as top-up for renovation / alteration of acquired house is also eligible for aforesaid tax benefit. | The tax benefits available in case of Construction loan is
similar to home loan. However, in case of construction loan the benefit of
interest paid during construction period is available to borrower in 5 equal
instalments from the year of completion of such property. |
Summing Up
There is no room for ambiguity when it comes to selecting the appropriate loan product, as each loan category serves distinct purposes. If your objective is to buy an already constructed property or entrust the construction process to a builder, a home loan is the suitable option. On the other hand, if you intend to personally undertake the construction, opting for a home construction loan is the right decision. Despite these disparities, the application, loan approval process, and repayment procedures are similar for both loan types.
