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What is a Home Construction Loan?
Building your dream home is one of the most exciting and fulfilling experiences you can enjoy. More importantly, it is a significant milestone in your life. It involves the luxury of being able to design your home based on your choices and preferences. Whether it is a bungalow in your hometown or a duplex in the city, you can build it from scratch. How? Well, that’s where the home construction loan kicks in.Building a home requires a significant financial investment, which is why it is a good idea to consider using a house construction loan to fund its construction.Specific loans designed for this purpose are known as Home Loans for the construction of houses. A house construction loan gives you access to the necessary funding to construct a house if you own a piece of land. But before applying for such a loan, you must understand certain vital facets of Home Loans for under-construction properties.Also read: What is Composite Home Loan?
How do construction loans work?
Here are some quick insights as to how Home Construction Loans work:
- Disbursements are in instalments A key difference between a regular Home Loan and a house construction loan is the disbursement method. House construction loans are typically disbursed in instalments or stages, also known as "tranches". It is based on the progress of the construction work. The lender may appoint an expert to assess the construction progress at different stages before releasing the funds.Disbursements are made as per the previously agreed schedule or milestones. Throughout this process, you will have to provide the necessary documents to update the progress of the construction work, which includes completion certificates, engineer's certificates, bills from contractors, and a work order for the Home Loan.
- The loan is for construction work A Home Loan for constructing a house is specifically for financing the construction of a new residential property. In most cases, it might not finance the purchase of the land or plot, as the amount disbursed would be on the estimated construction cost.The house construction estimate for a bank loan is on your construction plans. The lender determines it and usually covers costs such as labour, materials, permits, and other related expenses. You must provide a detailed building estimate format for bank loans in India and the construction plan to the lender as part of the loan application process
- Interiors are excluded It is important to note that a Home Loan for an under-construction property does not cover expenses related to the interiors or furnishings of the home. The loan is to provide you with construction money for the structure. Expenses like fixtures, fittings, and interior decor are not included in the loan amount, and you need to plan for these separately.
- Banks might deny payment in case of changes in the construction plan While applying for a bank loan to build a house, you must submit various documents, including the sale deed, NOCs and construction plan. Making significant changes to the approved construction plan can result in the bank freezing further disbursals. In such scenarios, you must submit the revised construction plan with revised costs to the bank.Disbursals will continue only after the bank reviews and approves the new plan, which can cause delays and additional paperwork for the house construction loan.
Also read: Everything you need to know about a Loan NOC
Key facets of Home Construction Loans in India
Here are some facets of Home Construction Loans that you should know:
How to apply for a Home Construction Loan?
Applying for a home construction loan is simple. Once you find the right lender, you can make an application, submit the relevant documents, and avail of the loan.
Credit Score and Home Construction Loan
A higher credit score raises the possibility of lower interest and favourable terms and conditions for your loan. A score above 750 is considered good.
Documents required for a Home Construction Loan
To avail of the Home Construction Loan, you need to submit the following basic documents:
- Proof of identity
- Proof of address
- Proof of income
- Bank statement
- Proof of other income
- Property documents
Eligibility Home Construction Loan
The eligibility criteria for home construction loan varies across different banks. Aditya Birla Capital comes with a simple eligibility criteria that includes the following:
- Minimum age: 21 years
- Maximum age: 60 years for salaried and 70 years for self-employed
Read more: Home Construction Loan Eligibility
How to close a Home Construction Loan?
Until construction is under process, you only have to pay the interest. Repayment of Home Construction Loans begins after the construction is complete. You can also make a prepayment to close your home construction loan.
Home Construction Loan interest rate
Like Home Loans, Home Construction Loans are also quite affordable. However, the Home Construction Loan interest rate varies across different lenders.
Difference between Home Loan and Home Construction Loan
While both Home Loans and Home Construction Loans are used for financing residential properties, there are some key differences between the two. Here is a comparison between Home Loans and Home Construction Loans in India.
| Parameters | Home Loan | Home Construction Loan |
| Purpose | Available for under-construction or ready properties. Construction is not the buyer’s responsibility. | Use is for building a brand-new house or another type of building, or extending an existing structure. |
| Disbursement | A lump sum amount is disbursed at the time of loan approval. | Disbursal is usually done in stages based on the progress of the construction. |
| Interest rate | Based on the prevailing rates of the bank or lending institution. Since this type of loan has higher demand, interest rates are more affordable. | Based on the prevailing rates of the financial institution. However, as this loan type has lower demand, only some lenders offer loans and interest rates are higher. |
| Repayment | Repayment starts after the loan is disbursed and usually offers longer tenures, up to 30 years. | Repayment starts after the construction is completed or per the agreed terms between the borrower and lender. Loan tenure is shorter, so EMIs tend to be higher. |
| Documentation | Documents required include property documents, income proof, KYC documents, sale deed, etc. | Documents required include a construction plan, construction estimate format for the bank loan, property documents, income proof, KYC documents, etc. |
| Tax benefits | After getting ownership, you can obtain tax benefits on interest and principal amount paid. | You can obtain tax benefits on interest and principal amount paid. Tax benefits are also available on the interest paid during the construction period. |
| Bank approval | You don't need to obtain any approval from the bank in case of changes in the construction plan. | You are required to obtain bank approval for changes in the construction plan. |
| Loan amount | The loan amount is based on property value, your eligibility and your profile. | The loan amount is based on the construction estimate, your eligibility and your profile. |
Also read: Comparison Between Land Loan And Home Loan
Key Takeaway
- It is important to note that the above comparison is indicative and may vary depending on different lenders' specific terms and conditions. It is advisable to thoroughly review the loan agreement and seek professional advice to understand the nuances of Home Loans and Home Construction Loans in India before making a decision.
- House Construction Loans are an excellent financing option to build your dream home from the ground up. They are disbursed in instalments based on the progress of the construction.
- You must know the specific terms and conditions associated with your Home Loans for building a house. These include exclusions, potential challenges related to changes in construction plans, etc.
- There are significant differences between Home Loans and Home Construction Loans. Before committing to a home construction loan, you must understand and carefully review the loan terms, fees, repayment schedule, etc.
- Wondering how to get a Home Loan to build a house? A good place to start is looking for lenders online since this type of loan is available with only some financial institutions. Trusted lenders, like Aditya Birla Capital, not only finance your dream but can also help you make informed borrowing decisions. With a simple application, processing, and disbursal process, we ensure you face minimum hurdles when obtaining finance for your home construction project.
FAQS - FREQUENTLY ASKED QUESTIONS
Is the construction of a house eligible for a Home Loan ?
No. Construction of a house is generally not eligible for a regular Home Loan. You will need to apply for a house construction loan if you want financing for constructing your house.
What is a construction loan for a house ?
A house construction loan is a type of loan that provides funds to finance the construction of a new residential or other type of property. The loan is disbursed in stages or instalments based on the construction progress. Once the construction is complete, the loan is converted into a regular Home Loan, and the principal and interest repayment begins like a regular loan as per the agreed terms.
Can I get a construction loan on an existing house ?
No. Construction loans are for financing the construction of a new residential property on a plot of land you own. You can also apply for other loans, such as home renovation, home extension, or top-up loans on your existing Home Loan.
Can housing loan benefits be claimed for under-construction properties ?
Yes. You can claim tax benefits for interest paid on Home Loans for under-construction properties in India. As per the Income Tax Act of 1961, you can claim tax deductions against interest paid on the Home Loan for under-construction property under Section 24(B). The Home Loan principal repayment is eligible for deduction under Section 80C.
However, you must know that the tax benefits are available only after the construction is complete and you have received possession of the property. Until then, only the interest component paid during the construction phase can be claimed as a deduction in five equal instalments as per the provisions of the Income Tax law.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
