In India, the ultimate and unanimous aspiration for all families is to live in their dream home. But, with real-estate prices sky-rocketing, it's next to impossible for individuals to pay the cost for purchasing a residential property out of pocket. 

To help individuals realize their property dreams, banks and non-banking finance houses offer two primary categories of loan products – home loans and home construction loans. Both these loans offer immense financial support to individuals who want to acquire a residential property. 

But, what’s the difference between these two loan categories? What are the features, eligibility requirements, and which loan category should you choose? We answer all these questions and more in this article. Let’s get started. 

In a Nutshell: What are Home Loans and Home Construction Loans? 

Before we get into the features, eligibility requirements and other factors, let’s summarize the differences between the two loan categories:

If you are looking to take a loan to purchase an already constructed property, an under-construction property, or a property that is yet to be built, then you can choose a home loan. On the other hand, if you wish to undertake the construction of a residential house for your use or investment purposes, then you can go in for a home construction loan.

Now that we have looked at the definitions, let's take a look at the similarities and differences between these two loan categories.

Additional Reading: Home Loan Eligibility

The Similarities between Home Loans and Home Construction Loans 

Though the purpose and objective of both these loan products are different, there are a few similarities. Irrespective of whether you apply for a home loan or home construction loan, the loan sanction process followed by lenders is similar. Additionally, the repayment options, the co-applicant rules are identical to both.

Now, let’s take a look at, 

The Differences between Home Loans and Home Construction Loans 

  • Required Documentation

The process of applying for a home loan is relatively more straightforward compared to the application process of a home construction loan.

    • For home loans – The applicant is required to provide essential KYC documents, income proof, along with the property's papers for verification purposes.  

    • For home construction loans – The applicant is required to provide several other documentation besides the ones mentioned above. Some of the additional documents needed include – the plot's legal authorization from the concerned local authorities, approval from the municipal corporation, blueprint of the proposed construction designed from an authorized architect or civil engineer, property tax papers and more. 

As you can see, the documentation required for home construction loans is more complicated compared to home loans, which, in turn, increases the approval time.

  • Maximum Loan Tenure 

The loan tenure is the time taken to repay the borrowed amount along with interest charged. Longer the tenure, smaller is the EMI and vice versa. If you have borrowed a bigger loan amount, with a shorter tenure, you have to pay a bigger EMI, which can limit your available monthly budget.

    • Home loans – The maximum repayment tenure for home loans is 30 years, giving borrowers ample time to repay the loan amount. 

    • Home construction loans – The maximum repayment tenure for home construction loans is much shorter – around 10 to 15 years. Depending on the lender, it can sometimes even be lesser than that. 

 

  • Rate of Interest

    • Home loans – Today, dozens of banks and NBFCs offer home loans, thereby making home loan rates highly competitive. However, keep in mind that the interest charged depends a lot on the eligibility of the borrower. If you have a good credit history, then you can avail home loans at lower interest rates.  

    • Home construction loans – Unlike home loans, construction loans are not widely available. Hence, you are likely to be charged with a higher rate of interest. 

 

  • Loan Sanction and Disbursal 

    • Home loans – Once you receive the approval, the lender transfers the sanctioned amount directly to your bank account or the account of the builder within seven working days. You will receive the entire loan amount in one installment.  

    • Home construction loans – Here, you receive the loan amount distributed in several installments. It usually takes three to five payments to receive the entire amount. The payments are spaced out to coincide with the phase of construction. Also, note that the lender can halt/cancel future installments if the construction doesn't happen according to plan.

 

  • Approved Loan Amount 

    • Home loans – Borrowers can receive up to 90% of the property value as loan amount when the price of the purchased property is less than Rs. 30 lakhs. For loans of higher value, borrowers can get up to 70 or 80% of the market value as the loan amount.  

    • Home construction loans – In such cases, since the property is yet to be constructed, lenders offer up to 50 or 70% of the total estimated cost of construction, as the loan amount.  

 

  • Tax Benefits

    • Home loan – Home loans offer income tax-savings for the borrower. The borrower can claim tax deductions up to permissible limits for both the interest paid and the principal borrowed. 

    • Home construction loans – Here, the borrower cannot claim any tax benefits until he/she submits the property completion certificate. Even if you have commenced loan repayments during the construction of the property, you cannot claim any tax benefits until construction is completed.  

Here’s a quick recap of the Summary of the Differences between Home Loans and Home Construction Loans:

Features Home Loans Home Construction Loans
Offered To Completed properties/under-construction properties For individuals who are planning to construct their own home
Maximum Tenure 30 years 7 to 15 years. It varies based on the lender.
Tax Benefits Available on both the interest and principal Available only after construction is completed
Maximum loan value 70% to 90% of the market value of the constructed property 50% to 70% of the total estimated cost of construction
Loan Disbursal The sanctioned amount is paid in a single installment Paid in several installments, depending on the progress of construction

 

Additional reading: Home Loan EMI Calculator

EndNote

Which should I choose? Home Loans or Home Construction Loans?

There's no confusion as to which loan product to choose as both these loan categories serve different purposes. If you are looking to purchase a constructed property or leave the construction to a builder, then a home loan is the right choice for you. On the other hand, if you plan to undertake the construction on your own, then go in for a home construction loan. Despite the differences, the application, loan approval process and repayment is similar to both.