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Home loans vs construction loans – a comparison

  • Jun 21, 2019
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Home loans vs construction loans – a comparison

Becoming a home owner has become rather easy today. No matter the type of home you wish to purchase, you can get the necessary finance simply by taking out a home loan. Banks and housing finance companies offer a wide range of home loans. Whether you wish to purchase a ready-to-move-in flat, an under-construction property, build a home on a plot of land or even renovate your home, you can choose from the right home loan that fits your requirement. That said, most borrowers are usually confused between a home loan and a home construction loan. Although the two appear similar, there are quite a few differences that borrowers need to consider while choosing the right type of home loan. So, we’ve listed out the difference between home loan and construction loan. Read on.  

Let’s begin by understanding the definitions of the two types of loans

What is a home loan?

A home loan is a kind of loan that can be taken to purchase either a ready-to-move-in property or one which is under-construction i.e. being developed by a builder. Borrowers are typically informed by the builder about the construction timelines and possession schedules. Also, most builders are typically affiliated with banks and HFCs and can help lenders get finance for the home loan. This is the type of property in which the borrowers do not have to do any construction or renovation work on their own.

What is a home construction loan?

If you have a plot of land and wish to build a bungalow, villa, or even a multi-storeyed building, you can take out a home construction loan. Such a loan is generally a short-term loan that you can apply for to meet with the costs associated with the home construction on your plot of land. This type of loan is only disbursed based on the construction period and lenders assess the completion of property construction at various intervals to ensure that the funds are used only for construction purposes.

Home loan vs construction loan – a comparison

While both, home and construction loans appear similar at first, there are quite a few differences between the two. So, let’s look at the major points of difference between home loan and construction loan.

The loan application process: The home loan application process is the first point of difference between the two types of loans. When it comes to a regular home loan, the borrower only needs to submit some basic documents including the property documents for verification purposes. However, if you wish to construct a house on a plot, you need to submit the legal authorization documents of the plot from the Municipal Corporation or local authority along with the basic documents and property documents. You also need to provide a blueprint or construction map of the design from an architect or authorized civil engineer as well as the property-tax submission documents. As is evident, the application process for home construction loans is a wee bit complex as compared to a regular home loan.

The interest rate: While comparing home loan and construction loan you should also consider the interest rate. Firstly, it is important to remember that not all lenders offer home construction loans. As a result, the few lenders that do, will charge you a higher home loan interest rate. You can get a basic home loan for at interest rates starting at 8% to 10%, whereas you could easily end up paying an additional 1.5% to 2% on home construction loans.

The tenure of the loan: Since home loans are high value loans, where you end up paying high-amount EMIs, you should certainly consider the loan tenure. Longer tenures result in smaller amount EMIs and vice versa. In case of regular home loans, you can get loan repayment tenures of 20-30 years, but for home construction loans, you get shorter loan repayment tenures of 7-15 years.

The process of loan disbursal: This is another important point of comparison while speaking of home loan vs home construction loan. Regular home loans are ideally disbursed into your account within a period of seven working days. The lender could also transfer this loan amount directly into the account of your builder. The entire loan amount is basically disbursed in a single instalment. On the other hand, home construction loans are ideally disbursed in three to five instalments, based on how much construction is completed. Also, lenders have the discretion to suspend or delay the instalments if construction comes to a halt or if they believe the sums are not utilized towards construction when they come to inspect the property at regular intervals.  

Apart from these basic differences between home loan and construction loan, you should also consider the tax benefits and the loan to value ratio when choosing either loan. Remember that a home loan of any kind is a high-risk loan so you should consider all the necessary factors before choosing one.

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