Home Loan Vs Construction Loan: Know The Difference

Introduction

Owning a home is a dream shared by many. But when it comes to financing your home, you may find yourself torn between different options, such as a home loan or a construction loan. Understanding the difference between a home loan vs a construction loan is crucial in making an informed decision that aligns with your home ownership goals, financial capacity, and tax planning strategies.

In this guide, we will look at a construction loan and home loan comparison with insights into the key aspects of housing loans. This will help you understand what sets them apart and which one may be more suitable for your specific needs.

Understanding Home Loans

A home loan, also known as a housing loan, is a financial product designed to assist you in purchasing a pre-constructed or ready-to-move-in property. A home loan is primarily used for buying residential properties such as flats, houses, or plots with existing structures.The loan amount you can secure through a home loan depends on various factors such as the property value, your income, creditworthiness, and the lender's policies. home loans offer an extended repayment tenure, usually ranging from 15 to 30 years. While a longer tenure results in lower Equated Monthly Instalments (EMIs), it may lead to higher overall interest payments over the loan term. Lenders provide fixed or floating home loan interest rate.

Understanding Construction Loans

A construction loan, as the name suggests, is specifically tailored for individuals who plan to construct their homes from scratch. A construction loan is exclusively designed for financing the construction of a new home on a piece of land you already own. 

The loan amount for a construction loan is disbursed in tranches or phases as the construction progresses. Lenders also provide very reasonable construction loan interest rates.

Key Differences Between Home Loans And Construction Loans

Now that we know the basics of the difference between a home loan vs a construction loan. To begin with, let's look at the key differences and do construction loan and home loan comparison:

1. Property Type: The most significant difference lies in the type of property each loan finances. A housing loan is designed for purchasing a pre-constructed property or a ready-to-move-in house or apartment. On the other hand, a construction loan is specifically tailored for individuals who plan to build their homes from scratch on a piece of land they already own.
2. Loan Disbursement: Another notable difference is how the loan amount is disbursed. With a home loan, the funds are typically provided as a lump sum at the time of purchasing the property. In contrast, a construction loan disburses the funds in stages as the construction progresses, ensuring that you have access to adequate funds at each milestone of the construction process.
3. Interest Rates: Both housing loans and construction loans offer the option of fixed or floating interest rates. A fixed home loan interest rate remains constant throughout the loan tenure, providing stability and predictability in your monthly repayments. On the other hand, floating construction loan interest rates fluctuate based on market conditions, which can potentially lead to fluctuations in your monthly repayments.
4. Tax Benefits: Both home loans and construction loans offer tax benefits under Section 24(b) and Section 80C of the Income Tax Act. These benefits include deductions on both the principal repayment and the interest paid on the loan. 

However, it's important to note that the timing of these benefits may vary. Home loan borrowers can enjoy immediate tax deductions, while construction loan borrowers can claim deductions during the construction phase.

Conclusion

Choosing between a home loan vs a construction loan is an important decision in your journey towards owning your dream home. By understanding the differences between these two types of loans, and considering factors such as your project budget, construction loan interest rates, repayment capacity, and property location, you can make an informed choice.

If you're ready to take the next step towards owning your dream home or need more information about a home loan vs a construction loan, Mahindra Finance offers a range of financing options tailored to meet your specific requirements. Explore our offerings today and take one step closer to turning your dream into reality.

FAQs

Q: What are the interest rates for home loans?

Home loan interest rates vary depending on factors such as the lender, loan amount, and tenure. It is advisable to compare interest rates offered by different banks or financial institutions before making a decision.

Q: Can I claim tax benefits on both principal repayment and interest paid for a construction loan?

Yes, you can claim tax benefits on both principal repayment and interest paid during the construction phase of a home built with a construction loan.

Q: How do I calculate EMIs for a home loan?

You can easily calculate your EMIs using online home loan calculator. Simply enter the loan amount, interest rate, and tenure to get an estimate of your monthly instalments.

Q: Can I switch from a home loan to a construction loan midway through building my home?

It is not possible to switch from a home loan to a construction loan once the property is already purchased. However, you may explore options like top-up loans or personal loans to finance any additional construction or renovation costs.