Home Construction Loan vs. Home Loan: Which One Is Better?

• With a home construction loan, you can construct your home from scratch just as you envisioned.
• You can purchase a ready-to-move-in property using a home loan.
• The down payment and interest rates are normally higher in construction loans as opposed to home loans.

Many aspire to own a home; and turning this aspiration into reality is possible in two ways: taking a home loan to buy an existing property or avail a construction loan to build one. Does this get you thinking about which one is better? If yes, then continue reading.In this blog, we will explore both these loan types and go through the construction loan vs. home loan comparison in detail.

A home construction loan empowers you to construct your home just as you envisioned it. It covers the cost of construction and lets you build your dream home.Here are some pointers that will help you understand the construction loan better:

• End Use: A home construction loan finances the construction cost to build your home.
• Amount: The loan amount covers a significant portion of the total cost and is usually disbursed in tranches as the construction advances.
• Repayment: You can typically expect a repayment tenure of up to 20 years.
• Tax Benefits: You can claim deductions with regard to the principal and interest amount in line with the applicable income tax provisions.

Before we explore the construction loan vs. home loan analysis let’s understand what a home loan is and its key features.You can purchase an existing property using a home loan . Here are some of the relevant aspects that you should know:

• End Use: You take a home loan to buy residential properties like an apartment, house, etc.
• Amount: You can expect to get a home loan covering up to 90% of the costs. You can get a fairly rough idea of the eligible loan amount using the Home Loan Eligibility Calculator online.
• Repayment: You can enjoy a repayment tenure of up to 30 years. Longer tenures result in lower EMIs (Equated Monthly Instalments) but may increase your overall interest cost.
• Tax Benefits: You can save taxes on the principal as well as the interest amount paid, subject to the fulfilment of the applicable provisions.

Understanding both loan products individually makes it easier to appreciate how differ from each other. Here’s a tabulation highlighting some of the key differences:

You can evaluate your decision and make an informed choice based on different parameters like: End Use The loan choices are obvious when it comes to the end use. If you want to construct your home from scratch, a home construction loan makes sense. In other cases, you may consider a home loan. Finances As mentioned above, a home construction loan is disbursed in phases basis the construction stage. Ask yourself if you will be able to manage the finances with a phased disbursement structure. If not, you may consider buying a ready-to-move-in house with a home loan. Down Payment The down payment requirements are comparatively higher in the case of a construction loan than the down payment for a home loan. Evaluate if your finances permit a higher down payment and choose accordingly. Tax Benefits Understand the applicable tax provisions in both cases and determine which loan type helps optimize your tax planning strategies.

A home construction loan and a home loan, both help you achieve your goal of owning a home. However, their end-use differs prominently. Also, there are differences in other aspects like down payment requirements, interest rates, and loan tenure.Given such differences, it is advisable to assess your current financial situation and long-term goals, to identify the suitable option for you. By consulting experts like an Aditya Birla Capital Representative, you'll find it easier to choose between a home construction loan and a home loan based on your specific needs. Also Read: What is a Home Loan - Meaning, Types & Benefits