Did You Know?
We serve loans, the best way you can borrow
Home is one of the most peaceful and precious places in the world. It is a place where you can spend time with your family and enjoy yourself. Everyone dreams of having a home of their own. But with rising real estate prices, owning a home is not so easy. Here is where the loans come into the picture.
You can fulfil your dream of having your own home with the help of loans offered by banks and NBFCs. There are mainly two types of loans available for home, i.e. home loan and construction loan. Both the loans differ from each other and serve different purposes. Hence, it’s necessary for a borrower to understand the difference to take final decision. In this blog, we will understand the difference between a home loan and a construction loan, which will help you choose the right loan.
A home loan is a secured loan which is offered to buy a ready-to-move-in house or apartment. The loan is given in one go after assessing the eligibility of the borrower. The loan amount has to be repaid in equated monthly instalments (EMIs) by the borrower. One can get a home loan up to 80-90% of the value of the property.
A construction loan is a loan offered to build a house on self-occupied land. The loan amount is disbursed in various stages depending on construction. Initially, the borrower has to pay only the interest amount until completion of construction. After that, it may be converted into a regular mortgage, or full repayment may be required.
Home loan and construction loan both can be used to build your house. However, they still differ from each other. Let us understand the difference between the same –
| Basis | Home Loan | Construction Loan |
|---|---|---|
| Purpose | It provides funds to buy a new ready-to-move-in house. | It funds you to construct a house on land. |
| Documents | The documents required for a home loan are identity proof, address proof, income proof, ITR of the last 2 years, proof of educational qualification, bank statement, details of existing loan, home loan application form and passport-size photo. | The documents required for construction lending are the plot’s legal authorisation document collected from the local municipal authority, blueprint, construction plan, and estimated cost of property. In addition to this, you also have to provide identity proof, address proof, income statement, etc. |
| Disbursal | The loan amount is disbursed in a lump sum at the time of purchase of the property. | The loan amount is disbursed in various stages of construction. |
| Tenure | The tenure of a home loan is quite long and can range from 10-30 years. | It has a shorter tenure ranging from 1-3 years. |
| Interest Rate | Has a lower interest rate in comparison to a home construction loan. | There is increased lender risk, due to which the interest rate is higher. |
| Collateral | The purchased house property is considered as collateral. | Land and ongoing construction are considered as collateral. |
| Repayment | EMI start after the loan is disbursed. | Only interest is paid during construction phases. |
| Approval Process | The approval process is quite simple. | It requires a construction plan, estimated cost of the property and a lot of other documents, which complicates the process. |
Whether to select a home loan or home construction loan depends on an individual’s requirements. If you are planning to buy a pre-constructed ready house, then you should go for a home loan. Whereas if you want to build a house in your own way on the land you have, then you should go for a construction loan.
Before choosing between a construction loan or a home loan, there are certain factors that you need to consider –
A home loan would be a good option for those who want to purchase a ready-to-move-in house or an under-construction property. On the other hand, a construction loan would be a good option for those who want to construct a house on the plot they already own.
Home loans for ready-to-move-in properties will be disbursed in a single lump sum amount, whereas home construction loans are disbursed depending on the construction progress.
Assess your financial capacity to determine your loan tenure. Shorter tenure leads to higher EMIs, but it will reduce your overall cost. If you are considering additional borrowing for personal expenses, you should also assess the repayment obligations of an instant personal loan before taking on additional debt.
You should also assess your tax planning objectives before choosing a loan. A home loan will give you immediate tax benefits, whereas a self-construction loan gives deductions during construction.
You should check the location and accessibility of your land. It should meet the legal requirements and should have enough infrastructure for construction.
Construction loans will ask for additional documents like a construction plan, blueprint, estimated cost of the property, and land ownership documents. You should check the lender’s loan eligibility criteria and documentation requirements beforehand.
Both home loans and construction loans are good options to finance a new house. The choice between the two depends on your financial situation, needs and timeline. One should evaluate both options depending on their priorities, budget and long-term goals, which will help them to make the right decision. If you want to buy a new, already constructed house, then a home loan is a better option, and if you want to construct on land on your own property, then a home construction loan is a good option.
A home construction loan is best suited if you want to build your own house on land you own. The loan amount is disbursed in different stages as the construction proceeds.
A home construction loan provides finance to construct a new house on an empty plot you own. Whereas a regular home loan provides finance to buy a ready-to-move-in house property. Both are disbursed in different ways, and their eligibility requirements also differ.
Yes, construction loans come with higher interest rates as there is higher risk involved due to an incomplete project. Lenders consider completed properties less risky, and that is why home loans have lower interest rates in comparison to home construction loans.
Construction loans are disbursed in different phases depending on the progress of construction. Here, the funds are released depending on work accomplished, like foundation completion or structural framing. Whereas home loans are fully disbursed at one time and allow you to purchase a ready-to-move-in house property.
After the construction work is completed, the construction loan is converted into a regular home loan. After this conversion, the borrower will have to pay fixed EMIs and interest and repay the loan.
Download our personal loan app to apply for a personal loan. Get up to 2Lakhs* as a personal loan. Download Now!
Sign into avail a personal loan up to ₹ 2,50,000
Unifinz Capital India Limited is a Non Banking Finance Company (NBFC) registered with the Reserve Bank of India (RBI). lendingplate is the brand name under which the company conducts its lending operations and specialises in meeting customer’s instant financial needs.
RBI CMS
RBI Sachet
