Owning a house is an important milestone, often representing both a financial and emotional investment. However, with rising real estate prices, many people find it challenging to afford their dream home. This is where Home Loans and Construction Loans come into play, providing the financial support needed to make homeownership a reality.
While these loan options may seem similar, they serve different purposes and come with varying terms. Understanding Home Loan vs Construction Loan comparison is essential before making a decision. Here's a brief guide to help you understand these two types of loans and choose the right one for your needs.
Factor
Home Loan
Construction Loan
Loan Purpose
Borrowing a Home Loan is to purchase a ready-to-move-in home or residential property.
A Construction Loan is a special credit product to finance the construction of a residential property from scratch.
Rate of Interest
A Home Loan typically has floating or fixed interest rates depending on the lender's discretion and borrower's preference.
The interest rate can be fixed or floating, but for a Construction Loan, it is slightly higher than for a Home Loan.
Repayment Terms
Generally, Home Loans have longer repayment terms of up to 30 years, allowing borrowers to distribute the loan cost over an extended period and smaller EMIs.
The repayment term largely depends on the property's construction timeline. The disbursements take place in instalments aligned to the construction project phases.
Loan Eligibility
Home Loan eligibility depends on the borrower's income, professional stability, credit history, and existing DTI ratio.
Eligibility for a Construction Loan involves scrutinising the construction plan, cost estimates, and project management.
End-Usage
The borrower can use a Home Loan to purchase a ready-to-move-in residential property only.
The borrower can use the Construction Loan for home construction-related expenses, such as material, labour, design, shipping, etc.
A Home Loan is a secured loan that financially assists people in purchasing ready-to-move-in residential properties. The lending institution applies an interest rate that the borrower must pay along with the principal amount in EMIs during the repayment tenure. The property they purchase remains collateral with the lender, which they may seize in the case of default. This feature makes these loans secure types of loans, enabling lenders to extend them at lower interest rates.
What is a Construction Loan?
A Construction Loan is a type of loan meant to support the construction of a property. Typically, borrowers submit their construction plan and cost estimates to the lender. The lending company evaluates the proposal and dispenses the funds in instalments. As the construction progresses, the lender releases funds to cover construction expenses at different stages.
The Similarities Between Home Loans and Construction Loans
Although Home Loans are different from construction loans based on several parameters, they still have some similarities one must know. Here are some important details about their similarities:
Factor
Similarity
Loan Purpose
Home Loans and construction loans are meant to buy or build a property for residential use. After borrowing any of these loans, the borrower takes the first step towards homeownership.
Type of Interest Rate
Although Home Loan interest rates are lower than construction loans, both loan types can have floating and fixed interest rates. Borrowers can choose one based on risk appetite, predictability, and repayment capacity.
Repayment Tenure
Both loan types have longer repayment terms, generally up to 30 years. Borrowers can use an EMI calculator to plan their repayment.
Security
The residential property remains collateral with the lender until the borrower repays the borrowed amount with interest in full.
Impact on the Credit Score
Timely repayment of both loan types improves the borrower's credit score over time.
A lump sum loan disbursal provides ample funding to purchase the desired property without delay.
The lender disburses the approved loan amount in instalments, making funds available exactly when the borrower needs them.
A Home Loan allows the borrower to purchase a long-term asset that increases in value over time.
The loan distributes the repayment amount in easy EMIs spread across a long tenure to keep them affordable.
Home Loan interest rates are lower than construction loans, lowering the purchase cost.
The borrower pays interest only during the initial stages of the repayment tenure. Advance interest payments keep the construction cost low during this period.
Additional Things to Consider While Making the Right Choice
One must consider the following factors when choosing between a Home Loan and a Construction Loan:
Purpose: A Construction Loan is an obvious funding choice for constructing a home on land from scratch. However, a Home Loan is more appropriate for purchasing a ready-to-move-in house.
Financial Requirement: An individual must assess their budget and funding needs. The lender disburses a Construction Loan in instalments at different stages of the construction project. However, a Home Loan disburses the loan amount in a lump sum for a one-time property purchase.
Tax Planning: When choosing a loan type, one must consider their tax-planning goals. While Home Loans offer immediate tax benefits on principal and interest payments, Construction Loans provide tax deductions during home construction.
How is a Loan Against Property Different from a Home Loan and Construction Loans?
While Home Loans and Construction Loans are popular funding products to purchase ready-to-move-in properties or construct a house from scratch, a loan against property is an entirely different credit product. Let's discuss the differences between them in the following sections:
Parameter
Home Loan/ Construction Loan
Loan Against Property
Purpose
To purchase or construct a residential property
To borrow a loan by pledging a property as collateral
Repayment Tenure
Up to 30 years
Up to 15 years
Loan Amount
Up to Rs 5 Crore for Home Loan and Rs 3 Crore for Construction Loan
The final decision between a Home Loan and a Construction Loan depends on the aspiring borrower's financial and project requirements. A Home Loan is ideal for purchasing a ready property, while a Construction Loan is suited for those building a house from scratch. If funds fall short, borrowers can choose the appropriate loan type for their goals. However, self-employed individuals or entrepreneurs looking for funds for personal or business purposes may consider a Loan Against Property from Hero FinCorp. This option allows them to use their existing property as collateral for the required funds.
Frequently Asked Questions
Can a Home Loan be used for construction? A Home Loan is not used for construction. You must borrow a Construction Loan to construct a house on a plot from scratch.
Can I take a Home Loan and not build a home? You don't take a Home Loan to build a home. The primary purpose of a Home Loan is to purchase a ready-to-move-in property that does not require construction.
How much loan is given for construction? You can borrow a Construction Loan of up to Rs 3 Crore.
Can I convert my plot loan to a Home Loan? You can easily convert a plot loan into a Home Loan by submitting an occupancy certificate to the lending institution.
What is EMI for under-construction property? The EMI for a loan on an under-construction property depends on the loan amount you borrow, the applicable rate of interest, and the repayment tenure you choose, which can be up to 30 years. The longer the tenure, the smaller the EMIs.
Katyaini is a finance expert with a focus on the non-banking financial sector, bringing over 8 years of experience in NBFC. She specializes in simplifying complex financial concepts for readers, helping them navigate the NBFC landscape. Outside of work, she is passionate about travelling.
