16 FEBRUARY, 2022

Buying a house is probably one of the biggest and most important investments that you make in life. It is a place where you start your family, make memories and often spend your entire life. Naturally, having your own home is a special feeling. Thankfully, buying a home is now easy with home loans. Lenders offer various loans to suit your needs and requirements. 

 

However, it could be challenging to choose the right kind of loan if you do not know about them. For example, do you know the difference between a home loan and a residential construction loan? Though they sound the same, many aspects differentiate them.

 

Here is a brief guide on a home loan and a residential construction loan and the difference between them. Read on.    

 

  • Home loan

A home loan is a secured loan that you can avail to buy a ready to move property, or an under-construction property. You can avail a home loan to buy your dream home and repay the loan amount over an extended period as per your chosen tenure. Usually, a home loan is available for a tenure of 20 years. You can get some tax benefits on the home loan.

 

  • Residential construction loan

A residential construction loan or home construction loan is a secured loan that you can avail to fund the construction of your house. Typically, this loan is disbursed in installments as per the progress of the construction process. Depending on the eligibility, the interest rates of this loan can be higher than home loans.

 

Difference between home loans and residential construction loans

 

Basis

Home loan

Home construction loan

Purpose

You can avail a home loan to buy a house property.

A home construction loan can be used to fund the cost of construction of your house.

Disbursal

The home loan is typically disbursed in a single installment.

The disbursal of a home construction loan is based on the stage of construction. It is disbursed in multiple installments. The lender usually monitors the progress of construction and disburses the next installment only when the last phase of construction is completed.

Tax benefits

You can claim tax deduction on the amount paid for the repayment of interest and principal component of the home loan as per the Income Tax Act, 1961.

The tax benefits on home construction loan is available in 5 equal installments only after the house construction is completed.

Tenure

The tenure of a home loan is longer and can be up to 20 years.

Home construction loans have shorter tenure of up to a maximum of 15 years. 

Down payment

You need to pay 15% of the property value as a down payment for a home loan.

Many lenders require you to pay a higher down payment equaling to 25% of the property value as down payment.

 

Both loans have their own pros and cons and can have different usage depending on your needs. However, they are high-value loans and can affect your finances if you do not plan them well. Before you apply for home loan or home construction loans, ensure to do adequate research and check your affordability.

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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.