Home Loan vs Home Construction Loan: Which One Is Better for You?

What is Home Loan?

If you are looking for a loan to buy a fully constructed, under construction, or yet to be built residential property, a Home Loan is ideal for you.

What is Home Construction Loan?

If you are looking for a loan to undertake the construction of a residential property for your own use or investment purpose, you can opt for a Home Construction Loan.

What are the similarities between Home Loan and Home Construction Loan?

As discussed, the Home Loan and Home Construction Loan help the borrowers to acquire their dream home. Depending on your repayment history and the lender you choose, both these loans have identical eligibility requirements, loan approval process, repayment terms, etc.

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What are the differences between Home Loan and Home Construction Loan?

Apart from the purpose for which the loan is taken i.e. to buy or construct the residential property, Home Loan and Home Construction Loan have several other differences. Here are some key differences between the two loans:

1. Rate of Interest:

Most banks and Housing Finance Companies offer Home Loans at competitive interest rates. The Home Loan interest rate depends on the applicant's credit history, loan amount, etc. With a good repayment history, you can negotiate the rate of interest with the lender.

Whereas, there are a few lenders that offer the Home Construction Loans, making the rate of interest higher compared to the Home Loans.

2. Loan Tenure:

Home Loan and Home Construction Loan; both are big amount loans. Hence, the tenures of these two loans are generally longer compared to the small amount loans like personal loans, car loans, etc. the longer the loan tenure, the lower will be your monthly instalment. But, you should know that with a longer loan tenure, you end up paying more interest amount.

When providing a Home Loan, the lenders treat your residential property as collateral. Hence, these loans are generally safe to offer. The Home Loan tenure can be up to 30 years. This gives borrowers sufficient time to repay the loan without making the monthly repayments stressful. However, since Home Construction Loans are riskier compared to Home Loans, the repayment tenure of these loans is typically 10 to 15 years. Depending on your credit history and the lender you choose, the Home Construction Loan tenure can even be shorter than that.

3. Documentation:

Most of us are aware of the Home Loan documentation process, which is relatively easy and does not require much documentation. To apply for a Home Loan, you need to submit your identity proof, address proof, and property papers. However, for a Home Construction Loan, you need several other documents apart from the KYC. Although the list of documents may vary from lender to lender, most lenders generally ask for the plot's legal authorisation from the concerned authorities, municipal corporation approval for the construction, and the blueprint of the construction design from an authorised civil engineer or architect, property tax papers, etc.

Since Home Construction Loan requires complicated documentation, the loan approval process is relatively longer. Before applying for the loan, it is advisable to check the list of documents. This will save your time and the approval will be faster.

4. Loan Disbursement:

Once your loan is approved by the lender, the entire Home Loan amount is immediately transferred to your registered bank account or builder's bank account as per the terms and conditions of the loan agreement.

However, in the case of a Home Construction Loan, the lender verifies whether the construction is happening as per the blueprint and sanctions the loan amount in 3 to 5 parts. In case the lender feels that the construction is not happening as per the blueprint, they can cancel or halt the future loan payments.

5. Loan Amount:

Home Loans are offered up to 90% of the property value if the property value is less than Rs 30 Lakhs. Similarly, for a higher property value, the loan is offered up to 70% to 80% of the property value.

Home Construction Loans are offered to the properties that are yet to be constructed. Hence, the loan amount offered is up to 50% to 70% of the total estimated cost of the project.

6. Tax Benefits:

You can claim the Home Loan principal amount and interest paid for tax deduction under the Income Tax Act. However, in the case of a Home Construction Loan, you have to submit the property completion certificate to claim the tax deduction.

To Conclude:

As you must have understood, there should not be confusion between choosing the right loan between a Home Loan and a Home Construction Loan as both of these loans serve different purposes. If you are planning to buy a constructed property or a property that is still under construction from a builder, the Home Loan is ideal for you. Whereas, if you are planning to undertake the property construction on your own, you should opt for the Home Construction Loan. Whichever option you decide to opt for, it is advisable to do thorough research and compare different banks and NBFCs before finalising the lender.

Warm Regards,
Ketki Jadhav
Content Writer