Home Loan vs Construction Loan: What is the Difference?

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6 min 15 Feb 2023

Highlights

What is a Home Loan?
What is a Home Construction Loan?
Differences between a Home Loan and a Loan for Home Construction

What is a Home Loan?

A Home Loan is a financial product designed to assist homebuyers in purchasing residential properties. The fund is typically provided by a bank, NBFC or an HFC as the principal loan amount, upon which an interest rate is applied, that the borrower repays in full, along with the principal sum.

The property itself serves as collateral which the lender may seize, in the case of non-repayment, making Home Loans a secured type of loan. This enables lenders to extend the loans at competitive interest rates.

What is a Home Construction Loan?

A Home Construction Loan, on the other hand, is a debt instrument meant only to support individuals constructing their own residential property.
Typically, the borrower has to submit their proposal, construction plans and the cost estimates to the lender, for them to evaluate and then dispense the funds.

As the construction progresses, funds are released in installments to cover expenses such as land purchase, foundation laying, structural work, and so forth. Please note that similar to every other kind of loan, the approval and disbursal of Home Construction Loans are also subject to the applicant’s loan eligibility.

Additional Read: Factors to Consider Before Applying for a Home Construction Loan

Differences Between Home Loan and Construction Loan

Here are the 6 factors that make a Home Loan different from a home construction loan:

Factor	Home Loan	Home Construction Loan
Purpose of Loan	Primarily used for the purchase of an existing residential property or ready-to-move-in homes.	Specifically designed to finance the construction or renovation of a residential property.
Interest Rate	Typically has fixed or floating interest rates, depending on the borrower's preference and the lender’s discretion.	Typically a little higher than Home Loans.
Loan Tenor	Generally has a longer loan tenor, commonly ranging up to 40 years, allowing borrowers to spread repayments over an extended period.	The tenor is often linked to the construction timeline, with disbursements aligned to project phases.
Loan Eligibility	Eligibility is based on factors such as income, credit score, employment stability, and existing financial obligations.	In addition to the criteria for Home Loans, eligibility for a Construction Loan may involve scrutiny of construction plans, estimates, and the borrower's ability to manage the construction process.

Also Read: Can I Claim Home Loan Tax Benefits on an Under-Construction Property?

Home Loan vs. Construction Loan: FAQs

Under the Section 24 of the Income Tax Act, one can claim a tax deduction of up to Rs.2 Lakh on the interest component of Home Construction Loan. However, the deduction can be claimed only if the construction is complete within 5 years of availing of a loan.

Yes, you can avail of a loan for constructing a house. While availing of a Home Construction Loan, you need to provide the lender with proposal, construction plans, and the cost estimates.

The construction loan amount one can get depends on various factors set by the lender such as repayment capacity and income. Usually, construction loan of up to 90% of the property’s value can be availed. You may co-apply for the loan to increase eligibility and loan amount.

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