The purchase or construction of a house is one of the biggest milestones in an individual’s life. If you are investing in a flat that is ready to move into or looking to build your dream home on land that you own, selecting the appropriate type of financing is crucial. Even though both home loans and construction loans are used for this purpose, they have different structures, disbursal patterns, eligibility, and repayment terms. This is a detailed comparison to assist you in making an informed choice.
What is a Home Loan?
A home loan is a secured credit given by housing finance companies and banks to individuals to purchase a ready-to-move-in residential property, an under-construction flat, or a resale house. The lender pays the sanctioned loan amount either in a lump sum or in tranches (if the property is under construction) to the builder or seller directly.
The prominent features of a home loan are:
- Purpose: For the purchase of a new or resale home or an under-construction house.
- Disbursal: Generally disbursed in one installment for ready-for-possession homes.
- Tenure: Can extend up to 30 years.
- Interest Rate: Provided on fixed or floating terms.
- Documentation: Comprises identity proof, address proof, income papers, property documents, and bank statements.
What is a Construction Loan?
A construction loan is geared towards those who already have a plot of land and want to build a house there. This loan is not for buying an already built house, but for financing the construction.
Important characteristics of a construction loan are:
- Purpose: To build a house on a self-owned piece of land.
- Disbursal: Committed in stages as construction is made.
- Loan-to-Value (LTV): Generally, not the cost of the plot if bought recently.
- Monitoring: Every construction phase is checked by the lender prior to disbursing funds.
- Tenure and Repayment: Like a home loan, but EMI generally initiates after complete disbursal.
Key Differences Between Home Loan and Construction Loan
Let’s look at the crucial distinctions between the two types of loans:
| Criteria | Home Loan | Construction Loan |
| Purpose | Purchase of new/resale/under-construction home | Construction of home on self-owned land |
| Loan Disbursal | Lump sum or construction-linked disbursal | Stage-wise disbursal linked to construction progress |
| Eligibility | Based on income, property value, and credit score | Based on construction plan, cost, and plot ownership |
| Interest Calculation | On full amount post disbursal | On amount disbursed at each stage |
| Documentation | Property sale deed, builder documents, etc. | Land ownership proof, construction plan, cost estimate |
| Supervision | Minimal | Regular inspection by lender-appointed engineers |
| Plot Financing | Plot value included if builder-sold property | Only included if plot was bought recently |
Role of Construction Loan EMI Calculator
It is important to understand the cost of a construction loan before applying for it. Here, a construction loan EMI Calculator is necessary. It assists prospective borrowers in estimating their EMI per month based on:
- Loan amount
- Interest rate
- Loan term
As construction loans are released in installments, the EMI could start on the basis of the amount released and increase progressively with subsequent releases. The calculator offers a proper idea of how your repayment plan would be and aids in arranging your finances sensibly.
When Should You Opt for a Home Loan?
Home loan is apt if:
- You’re purchasing an under-construction or ready-to-move-in property.
- You desire possession of a home immediately.
- You would like to have a simple disbursal and repayment process.
- You are buying a house from a renowned builder having pre-approved plans.
When To Take a Construction Loan?
A construction loan is suitable when:
- You already have a piece of land and wish to construct a custom-designed home.
- You want greater flexibility in design, size, and layout.
- You intend to build the home in stages, based on your budget.
- You don’t have an urgent need to shift in and can wait for the construction to finish.
Selecting the Ideal Lending Partner: Grihum Housing Finance
While choosing a lender, it’s essential to choose one who knows your specific financial objectives. Grihum Housing Finance provides home loans and construction loans with low-interest rates, flexible tenures of repayment, and customer-centric assistance. Their clear procedure and tailored loan plans enable people to purchase or construct a house without fiscal stress.
Conclusion
Knowing the difference between a construction loan and a home loan is important in selecting the appropriate route to homeownership. If you’re purchasing an existing house, a home loan is the most suitable. If, however, you’re constructing a house on your own property, a construction loan is more appropriate for your situation.
In order to make proper decisions, always evaluate your financial position, future goals, and repayment ability. And whether you want to construct or purchase, Grihum Housing Finance offers the appropriate tools and professional advice to assist in your home ownership process. The purchase or construction of a house is one of the biggest milestones in an individual’s life.