Home loan vs Home Construction Loan
Planning to build your dream home? Then it’s crucial for you to understand the difference between a home loan and a home construction loan. While home loans are for purchasing properties, construction loans cater specifically to those who own land and wish to build their homes. You can also avail yourself of a construction loan for home renovation due to damage caused by natural elements or simply because you want to extend the house. This blog navigates the intricate landscape of Home Construction Loans, offering insights into eligibility, interest rates, and the myriad benefits.
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Heres a table contrasting the differences–
| Factor | Home Loan | Home Construction Loan |
| Purpose | Used for property purchase. | Used for building on land or further construction. |
| Loan Application Process | Simple online or in-person process. | More complex, involves finding qualifying lenders. |
| Interest Rates | Typically lower due to competition. | Higher due to limited lender options. |
| Documentation | KYC, credit score, income proof. | Land ownership, property design, tax filing, etc. |
| Loan Tenor | Longer, up to 30 years. | Shorter, typically 7 to 15 years. |
| Loan Disbursement | Lump sum disbursement. | Disbursed in installments based on construction progress. |
What are Home Construction Loans?
- Purpose: Home Construction Loans are specifically designed for individuals who own land and want to build their homes from scratch.
- Distinguishing Factor: Unlike regular home loans for purchasing properties, construction loans focus on financing the construction process.
- Coverage: These loans cover all expenses related to the construction project, from planning to execution.
- Versatility: You can take a short-term construction loan for renovation or even for extensions to an existing house.
- Multi-Feature Security Loans: Typically, these loans offer multi-feature security, ensuring comprehensive coverage for the entire construction project.
- Streamlined Process: Lending institutions often expedite the loan process, minimizing the chances of delays in project execution.
Are home loans for land purchase and construction the same?
No, they are not. For purchasing a piece of land, one can apply for a plot loan. It does not deal with the construction of buildings. However, a home loan for house construction on the said plot will need an application for the home construction loan.
Read: 1 Crore Home Loan EMI With Calculator And Interest Rates 2024
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Benefits of Home Construction Loans
There are many benefits as to why you should opt for a home construction loan. Let’s take a look.
- Desirable Interest Rates: Although home construction loan rates vary among lending institutions, they generally offer attractive interest rates.
- Extended Tenures: Home construction loan tenures are longer, often extending up to 30 years, providing flexibility for repayment.
- Higher Loan-to-Value Ratio: These loans typically have a higher loan-to-value ratio, covering 100% of the construction cost estimate or 90% of the property valuation, whichever is lesser.
- Tax Benefits: Home construction loans come with desirable tax benefits, including deductions of up to Rs 5 lakhs for individuals and an additional Rs 1.5 lakhs for first-time homebuyers under Section 80 EEA.
- Balance Transfer Facility: Most lending institutions offer a balance transfer facility, allowing borrowers to shift their remaining home loan to a new lender offering lower interest rates.
- Top-Up Facilities: Financial institutions often provide top-up facilities, enabling borrowers to access additional loan amounts on top of the existing home loan, with the maximum limit varying between lenders.
Home Construction Loan vs Mortgage
Although both are related to houses, there are some critical differences between them. They are:
| Comparison | Home Construction Loan | Mortgage |
| Duration | Short-term (around a year) | Long-term (5 to 30 years) |
| Early Repayment | No penalty for early repayment | Occasional corrections for early repayment |
| Disbursement | Instalments based disbursement | Interest charged on the entire loan amount |
| Land Purchase | Can include funding for land purchase | Typically doesn’t fund land purchases |
Home Loan for Under-Construction Property
You can apply for home construction financing loans for properties under construction to complete the construction of residential property without any further delay. Builders under financial constraints mainly apply for builder construction loan amid construction.Unlike typical home loans, the home loan disbursement process for under-construction properties is a little different. As part of the property construction loan process, these types of loans are disbursed in instalments. Each time the builder demands payment, the lending institution will release portions of the loan amount. For repayment of the loan, some lending institutions only charge the EMIs on the amount disbursed. Due to this reason, the EMIs are on the lower side.
Read: Home Loan for Pensioners in India: Schemes, Eligibility & Interest Rates
Home Construction Loan Interest Rates: Best Construction Loans
Here is a complete list of the various rates of interest and processing charges of the home construction lenders that give home loans for construction on the land.
| Bank Name | Rate of interest per annum | Processing fees (Taxes are excluded) |
| HDFC | 6.90%-7.55% | 0.50% of the loan amount |
| SBI | 7.70%-7.90% | 0.4% of the loan amount |
| ICICI Bank | 7.20%-8.20% | 0.50% of the loan amount |
| Punjab National Bank | 7.50%-8.80% | 0.30% of the loan amount |
| Axis Bank | 8.55% onwards | 1% of the loan amount |
| Canara Bank | 6.95% onwards | 0.50% of the loan amount |
| Bank of India | 6.55% onwards | 0.25% of the loan amount |
Kindly note that taxes are also applicable to the processing fees.
Funding your Dream Abode: The Home Construction Loans that can Make it Happen!
When it comes to building your dream home, the cost can be significant, and not everyone has the funds upfront. Taking a home construction loan is an excellent option for people looking to build their homes without any financial constraints. Here are some of the best places to get a construction loan and their details:
Read: Exploring Bank Rate and Repo Rate in 2024
- SBI Home Construction Loan:
- State Bank of India offers home construction loans with a maximum tenure of 30 years, making it an excellent option for those looking for long-term loans. The loan covers up to 90% of the construction cost, and the interest rates range from 7.90% to 8.40%. You can apply online, and the processing fee is 0.40% of the loan amount.
- HDFC Home Construction Loan:
- HDFC is a trusted name in the home loan market, and it offers home construction loans with a maximum tenure of 20 years. The loan covers up to 85% of the construction cost, and the interest rates range from 8.10% to 9.05%. The processing fee is up to 0.50% of the loan amount.
- Axis Bank Home Construction Loan:
- Axis Bank offers home construction loans with a maximum tenure of 20 years. The loan covers up to 90% of the construction cost, and the interest rates range from 8.55% to 9.15%. You can apply online, and the processing fee is up to 1% of the loan amount.
- ICICI Bank Home Construction Loan:
- ICICI Bank offers home construction loans with a maximum tenure of 20 years. The loan covers up to 80% of the construction cost, and the interest rates range from 8.10% to 8.95%. You can apply online, and the processing fee is up to 0.50% of the loan amount.
At NoBroker, we can help you avail of home loans for construction, which cover up to 80% of the construction cost, with a maximum tenure of 20 years. The interest rates start from 6.75%, and you can apply online by visiting our website.
Read: Earnest Money Deposit – Advantages and Features
Eligibility Criteria for Self and Salaried Person
For salaried person
- The applicant’s age should not be less than 18 or more than 65.
- The applicant must be a resident Indian or an NRI.
- The applicant should be a salaried employee and should be working with the current employer for at least one year.
- The applicant should have a permanent address or a rental address where they have been staying for at least one year before applying for a loan.
- A good credit score of at least750 or above is obtained from a recognised credit bureau.
For self-employed
- The applicant’s age should be between 18-65 years.
- The applicant must be a resident Indian or NRI.
- The applicant must be a self-employed professional (SEP) or a self-employed non-professional (SNP)
- The applicant must have a permanent residence or a rental address where they have stayed for at least 12 months before the loan application.
- A credit score of 750 and above was obtained from a recognised credit bureau.
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Documents required for Self and Salaried Person
Here is a detailed checklist of the documents required for a home construction loan.
For salaried applicants
Identity Proof (Any one of the following)
- Aadhar card
- Passport
- Voter ID card
- Valid driving license
- PAN card
Residence Proof (Any one of the following)
- Passport
- Voter Id
- Employer ID card
- Aadhar card
- Utility bills
Proof of Income
- ITR returns and the latest Form 16
- Salary credit history to the salary account for the last six months
- Salary slips/certificates for the previous three months
Property Documents
- Encumbrance certificate
- Plot Title Deeds
- An estimated construction cost as assessed by a civil engineer/architect
- The local authority has sanctioned a copy of the plan.
Other documents
- Self-contribution proof
- Letter of appointment/ Employment contract in case the ongoing employment period is less than 12 months
- Bank account statements for repayments towards other loans, if any
- A cheque for the processing fee in favour of the lending institution
- A duly filled loan application form with affixed passport-sized photos of the applicant/co-applicants.
For self-employed applicants
Identity Proof (Any one of the following)
- Aadhar card
- Passport
- Voter ID card
- Valid driving license
- PAN card
Residence Proof (Any one of the following)
- Passport
- Voter Id
- Employer ID card
- Aadhar card
- Utility bills
Proof of Income
- ITR returns along with the income generated by the applicant and the business entity (CA attested) for the last three financial years.
- Balance sheets as well as Profit and Loss statements with Annexures/Schedules of both the business entity and the applicant (CA attested)
- Applicant’s savings account statements and the current account statements of the business entity for the last six months.
Property Documents
- Plot Title Deeds
- Encumbrance certificate
- An estimated construction cost as assessed by a civil engineer/architect
- The local authority has sanctioned a copy of the plan.
Other documents
- Self-contribution proof
- Latest Form 26AS
- Business Profile
- Memorandums and articles of associations of the company
- Partnership deeds (for partnership firms)
- A detailed list of the shareholders and Directors with their respective shareholdings (in the case the business entity has already been established as a company)
- Bank account statements for repayments towards another loan (if any) for both the applicant and the business entity
- A cheque for the processing fee in favour of the lending institution
- A duly filled loan application form with passport-size photos of the applicant/co-applicants affixed and signed across.
A Home Construction Loan is the key to turning your dreams into reality. You can proceed after comparing interest rates and the different range of benefits available. But delays and complexities may arise in navigating this path alone. Trust NoBroker to streamline your journey. Our years of expertise ensures a hassle-free experience. Contact NoBroker Home Loan solutions to build your dream home efficiently.
Frequently Asked Questions
Q1- Is there any tax benefit on a home loan for an under-construction property?
Ans1- Home loans for under-construction properties are liable to a tax deduction for up to Rs 2 lakhs on the interest paid at the year ending and up to Rs 1.5 lakhs on the principal amount paid under section 80 C of the Income Tax Act.
Q2- Is there any processing fee for a home construction loan?
Ans2- Yes. Banks usually charge a small percentage (0.4-2%) of the home loan amount as the processing fees.
Q3- What documents are required while applying for home construction loans?
Ans3- Proof of residence, Proof of identity, property documents, and income proof (The balance sheet and profit/loss statement for business entities) are mandatory while applying for home construction loans.
Q4- When does home loan EMI start for an under-construction property?
Ans4- EMIs have to be paid from the beginning of construction.
Q5- Which banks give home construction loans?
Ans5– Many nationalised banks such as SBI, Canara Bank, Bank of India, PNB and a few other private banks such as HDFC give residential construction loans for the construction of the house based on the construction loan eligibility of their customers
Q6- Can I take a construction loan for addition to home?
Ans6– Yes, you can take a construction loan for additions to your existing home. Whether you’re looking to extend your living space or renovate, a construction loan can cover the costs associated with enhancing your current home.
