Differences between Home Loans and Construction Loans

Banks and non-finance companies such as Bajaj Finserv offer both home loans and home construction loans to applicants who want to acquire a property. Borrowers avail home loans for already constructed properties, under construction properties, or those that will be constructed in the future. However, those who wish to construct a building, whether for a residential house or purely for investment purposes, may have to go for a construction loan.

Lenders offer home construction loans for paying the cost of constructing a dwelling unit or building a home on a plot of land that may be within your existing property. They offer it for the period when the construction work is in progress. A mortgage on the property being financed secures the loan. The lender will intermittently make sure the borrower is using the funding for the purpose intended.

Benefits of Home Loan

Similar to home construction loans, home loans also have a fixed-obligation-to-income ratio. Banks offer up to 80 percent of the home value as a loan to applicants of home loans. Borrowers of home loans also qualify for tax deduction on payment of the principal amount under Section 80C of the Indian Income Tax Act, and for the interest component under Section 24(b) of the Indian Income Tax Act.

Additional Read: Home Loan Tax Benefits under Section 24, 80EE and 80C

Home Loan Interest Rate vs. Construction Loan Interest Rate

Banks and other lenders charge interest rates in similar terms for both home loans and construction loans. However, they charge home loan rates a few basis points lower than the interest rates for home construction loans. Although the lender charges additional processing fee for both types of loans, they may make some minor differences based on the profile of the borrower.

Also Read: Know about Different Types of Home Loans

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