Everybody wants to purchase a home at some point in their lives. It could be to support a family or make a successful real estate investment. Due to the ever-rising cost of real estate, it is impossible to have your own home without any financial help from LIC Housing Finance or any other financial institution. To realize this dream, banks and other financial institutions such as PNB Housing Finance provide home loans and home construction loans, or construction loans as they are more commonly called.
Both loans are beneficial if you are thinking about buying a house. But you need to be aware of a number of differences between home loans and construction loans before actually making a choice. Despite the similarities between the two, they differ in a number of ways that make these loan choices appropriate for different requirements. Let’s first understand the definitions of the terms “home loan” and “home construction loan” before moving on to their differences to understand which loan best suits your need.
What is a home loan?
A home loan is an amount that a person borrows to purchase or build a home for themselves or their families. Through a home loan, you can obtain up to 80% of the value of the house. Section 80C of the Income Tax Act permits the tax deduction of a home loan from LIC Housing Finance or a loan taken from other financial institutions as well.
What is a home construction loan?
A home construction loan is a part of a home loan and is typically chosen when you want to build a residential home for your own use or as an investment. Home construction like the PNB Housing Finance loan allows you to borrow up to 100% of the cost of the construction but no more than 90% of the market value.
Home Loan and Home Construction Loan differ significantly in the following ways:
- Interest Rate: Home loans are generally available from banks and housing finance companies such as PNB Housing Finance at reasonable rates of interest. The applicant’s credit history, loan amount, and other factors affect the interest rate for a home loan. You can work out a better interest rate with the lender if you have a solid repayment record. The Home Construction Loans, however, are only provided by a few lenders. Thus, their interest rate is higher than that of Home Loans.PNB Housing Finance is one such bank that provides the same.
- Loan Tenure: Both the home loan and the loan for home construction are big amounts of loans. Therefore, compared to small amounts of loans like personal loans, vehicle loans, etc., the terms of LIC Housing Finance for a home loan and home construction are often longer. Your monthly payment obligation will be reduced the longer the loan tenure you choose. However, you should be aware that a longer loan term results in higher interest payments.
The maximum loan term for a home loan is 30 years. As a result, borrowers have enough time to pay back the loan without feeling pressured to make large monthly payments. However, the repayment period for home construction loans is longer than for home loans because they are riskier.
- Documentation: The majority of us are aware of the relatively easy and minimal documentation requirements for home loans which is identity proof, address proof, and property papers. However, in addition to the KYC, you also need a number of other documents for a home construction loan. Although the required documentation varies from lender to lender, the majority of lenders require the plot’s legal authorization from the concerned authorities, municipal corporation approval for the construction, and the blueprint of the construction design from an authorized civil engineer or architect property tax papers, etc.
Note: The approval process for home construction loans is somewhat longer since extensive documentation is needed. Moreover, the lending institution will conduct a thorough check of the land that you wish to build on before disbursing the loan. The bank will check land records and municipal permissions. It has an LTC of about 75%.
- Loan Disbursement: As soon as the lender approves your loan, the full amount of the home loan is promptly transferred to your registered bank account or the builder’s bank account.
However, in the case of a home construction loan, the construction loan cannot be applied for and disbursed immediately. Before the loan is disbursed, you might need to build the house up to the plinth level or lay the foundation. This implies that you will have to pay out of your pocket for the construction to start. The lender, for example, PNB Housing Finance, confirms that the building is proceeding in accordance with the blueprint and then only sanction the loan amount in three to five instalments. That is, the home construction loan is disbursed in instalments according to the various development stages. The number of instalments may range from two to twenty, depending on the project schedules you have submitted to the LIC Housing Finance or any financing company. Lenders have the right to stop or cancel future loan payments if they believe the construction is not proceeding as planned.
- Loan Amount: If the property’s worth is less than Rs 30 lakhs, home loans are available for up to 90% of the property value. Likewise, for properties with larger values, loans up to 70–80 percent of the value of the property are available. Home construction loans are also offered to properties that are yet to be constructed. In that case, the loan amount granted is between 50 and 70 percent of the project’s total expected cost.
- Tax Benefits: The Income Tax Act allows you to get a tax deduction on the home loan principal amount and interest payments made on your home loan. However, in order to claim the tax deduction for a home construction loan, you must submit the property completion certificate.
As you must have realized, since a home loan and a home construction loan have different goals, there shouldn’t be any doubt about which loan to choose. The Home Loan is perfect for you if you want to purchase a constructed property or a property that is still being built by a builder. In contrast, you should choose a home construction loan if you intend to build the property on your own. Irrespective of the choice you choose, it is advised to conduct extensive research and evaluate various banks and NBFCs before settling on a loan. The eligibility criteria, loan approval procedure, and repayment terms for both of these loans provided by various lenders LIC Housing Finance are somewhat the same and depend on your credit history and the lender you select.