Home Loan vs Home Construction Loan - Which Is Better? - Home Loan Stories | Kotak Mahindra Bank

25 MAY, 2021

A home is a place where you spend time with your family and make memories. Not only does it have an investment value but also an emotional one. Naturally, you would want it to be one of the best. However, with the skyrocketing real estate prices, it is no longer possible for most people to purchase a house property from their pocket. This is where loans can come to your rescue. 

With a loan, you can move into your own house without draining all the savings. To make things easier, lenders offer different kinds of loans that you can avail as per your need. However, multiple loans can create room for confusion too. For example, which is better for you? A home loan or a home construction loan? So, here we have listed down the difference between a home loan and home construction loan to help you choose a suitable home loan.  

Home Loan
Home loan is a secured loan that you can avail to purchase your dream home. It is available for the purchase of a pre-built, ready-to-move or under construction house. Home loans have longer tenure and lower interest rates than personal loans. You can also avail tax benefits on a home loan.   

Home Construction Loan
Home construction loan is offered by lenders for constructing a residential property on a land owned by the borrower. The amount of home construction loan is usually disbursed to the borrower in installments as per the stage of construction. The interest rates of a home construction loan can be higher than home loans.   


Home Loan vs Home Construction Loan Comparison

 

Basis

Home Loan

Home Construction Loan

Documents

Documents required for home loans include income proof, identity and address proof, bank statements, salary slips, official address, ITR of the last two years, proof of educational qualification, details of existing loans if any, home loan application form and a passport size photo.

For a home construction loan, you need to submit documents such as plot's legal authorisation document procured from the local municipal authority. You might also need to submit a blueprint, construction plan and estimated cost of the property. These documents are over and above the documents which you submit for a home loan like identity proof, address proof, income statement, etc.

Disbursal

A home loan is usually disbursed in a single installment in the borrower’s account.

The loan amount of a home construction loan is disbursed in multiple installments based on the construction progress. The lender could choose to monitor the progress of the construction and disburse the next installment only when the construction of the previous phase is completed.

 

Loan tenure

The tenure of a home loan is usually longer. You can take a home loan up to a maximum tenure of 20 years.

The tenure of home construction loans is usually shorter than that of a home loan.

Tax Benefits

Other than tax benefit of the principal repayment under Section 80C, you can claim a tax deduction from your income on the interest repayment under section 24(b) Income Tax Act, 1961, if the construction is complete.

The deduction on the interest repayment can only be claimed after the construction of the house in completed.

Interest rate

Lower than a home construction loan

Higher than home loan

 

Both loans have their pros and cons. You can envision your dream home to decide which loan would be suitable for you. If you dream of living in a house constructed your way, taking a home construction loan could be better where you can get your house constructed from scratch. However, if you wish to get a pre-designed ready home, a home loan would be a better choice.

To Sum up
Both home loans and home construction loans are high-value loans that can be a huge financial obligation in the long run. You must do thorough research and consider factors like tenure, interest rate, tax benefits, Loan to Value Ratio, application process and other charges before making the decision. Meanwhile, to know more about home loans, visit the home loan section of our website.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.