Difference Between Construction Loan and Home Loan: What You Should Know

December 03, 2024

home-loan-vs-home-construction-loan

Planning to take a home loan? Before you apply, know your purpose first. In India, there are different types of home loans available with each offering financing for a particular purpose. For example, a home purchase loan is designed for buying a pre-constructed or read-to-move-in residential house or property, while a home construction loan offers financing to build a new house on a plot/land you own. 

 

In this blog, we have decoded the difference between a home loan and self-construction loan so that you can make an informed decision.

 

What is a Home Loan?

A home loan or home purchase loan is a secured loan that allows you to purchase a pre-constructed or ready-to-move-in residential house or property. The loan amount varies across banks but is usually up to 85% of the total cost of the property. If your loan application is approved, the loan amount is usually disbursed in full if it’s a pre-constructed or ready-to-move-in property. For under construction properties, the loan is disbursed in instalments basis the stages of the construction. Point to note: in case of partial disbursement, you have to pay pre-EMI interest till the loan is disbursed in full, after which your EMI starts.

 

Additionally, for under construction properties, the loan is disbursed directly to the builder whereas for resale properties, the loan is disbursed to the seller. The loan tenure usually ranges from 1 year to 20 years. 

 

What is a Construction Loan?

A construction loan, also known as self-construction loan, is a secured loan designed for those who want to build a house/property on a plot or land they own. The loan amount varies across banks but is usually up to 70% of the total construction cost. Like home purchase loans, construction loans come with fixed or floating interest rate.

 

For construction loans, the loan amount is disbursed in a staggered manner basis of the stages of construction. The tenure is similar to that of home loans.

 

Construction Loan vs Home Loan: A Quick Comparison

Let's do a quick comparison between construction and home loan for a better understanding. 

 

 Construction loanHome loan
SuitabilitySuitable for individuals planning to build their own homes on a land they own.Ideal for individuals looking to purchase an existing property.
DisbursalsDisbursed in instalments as the construction progresses.Entire loan amount is disbursed upfront. For under-construction properties, loan is disbursed in instalments.
Interest ratesFloating and fixed interest rate.Floating and fixed interest rate.
Repayment tenuresUp to 20 years.Floating and fixed interest rate.
Tax BenefitsTax benefits on both principal and interest amount Tax benefits on both principal and interest amount

 

Scenarios Where Construction Loans are Preferred

  1. Building a Customised Home

    If you have a specific vision for your dream home and want to customise every aspect of it, a construction loan is a suitable option. It allows you to build a house according to your preferences without compromising on design elements.

     

  2. Renovations or Additions

    If you already own a property and want to renovate or add additional structures to it, a construction loan can finance these projects. From expanding your living space to remodelling your kitchen, a construction loan can help you transform your existing property into your dream home.

     

Example: Mr. Sharma wants to add an extra floor to his existing house to accommodate his growing family. By opting for a construction loan from Ujjivan SFB, he can access funds at each stage of the construction process and fulfill his renovation plans seamlessly.

 

Scenarios Where Home Loans are Preferred

  1. Ready-to-Move-In Homes

    If you are looking for immediate possession of a property without the hassle of construction, a home loan is the ideal choice. Whether it's a brand new apartment or a resale property, a home loan provides the necessary financing for your purchase.

     

  2. Time Constraints

    If you have a limited timeframe to purchase a property, such as when relocating for work or personal reasons, a home loan allows you to expedite the process. With the entire loan amount disbursed upfront, you can quickly finalise the purchase and move into your new home.

Final Thoughts

Understanding the differences between construction loan and home loan is crucial when deciding on property financing options. If you have specific customisation requirements or plan to renovate an existing property, a construction loan can provide the necessary funds at each stage of construction. On the other hand, if you prefer immediate possession of a ready-to-move-in property, a home loan is more suitable.

 

Buying a house has never been this easy! Avail Ujjivan SFB’s wide range of affordable home loan products and enjoy a hassle-free loan journey. From house purchase loan to plot loans and home improvement loans, we have it all! Alternatively, you can browse through Ujjivan SFB product suite - our wide range of financial products are designed to make your financial life better.

 

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FAQs

1. What documents are required for a construction loan application?

To apply for a construction loan, you typically need to provide documents such as the property's legal papers, architectural plans, cost estimates, and your income and identity proofs.

2. Can I avail of a home loan if the property is still under construction?

Yes, banks offer home loans for properties that are under construction. These loans are typically disbursed in tranches based on the construction progress.

3. How do I calculate the eligibility for a construction loan?

Lenders assess your eligibility for a construction loan based on factors such as your income, credit score, existing loans, and the collateral value of the property.

4. Can I avail of tax benefits on a construction loan?

Yes, you can claim tax benefits on the interest paid during the construction phase under Section 24(b) of the Income Tax Act.

5. How is the loan repayment process different for construction loans and home loans?

In case of the repayment of a construction loan property financing options, the EMI starts after the construction is complete, though you may have to pay pre-EMI interest. EMIs for home loans where the loan amount is disbursed in full start immediately after disbursement.

6. Can I avail of a construction loan to purchase an already-built property?

No, construction loans are specifically designed to finance the construction or renovation of a property, not for purchasing an already-built property.

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