Difference Between Construction Loan and Home Loan: What You Should Know

Planning to take a home loan? Before you apply, know your purpose first. In India, there are different types of home loans available with each offering financing for a particular purpose. For example, a home purchase loan is designed for buying a pre-constructed or read-to-move-in residential house or property, while a home construction loan offers financing to build a new house on a plot/land you own. 

In this blog, we have decoded the difference between a home loan and self-construction loan so that you can make an informed decision.

What is a Home Loan?

A home loan or home purchase loan is a secured loan that allows you to purchase a pre-constructed or ready-to-move-in residential house or property. The loan amount varies across banks but is usually up to 85% of the total cost of the property. If your loan application is approved, the loan amount is usually disbursed in full if it’s a pre-constructed or ready-to-move-in property. For under construction properties, the loan is disbursed in instalments basis the stages of the construction. Point to note: in case of partial disbursement, you have to pay pre-EMI interest till the loan is disbursed in full, after which your EMI starts.

Additionally, for under construction properties, the loan is disbursed directly to the builder whereas for resale properties, the loan is disbursed to the seller. The loan tenure usually ranges from 1 year to 20 years. 

What is a Construction Loan?

A construction loan, also known as self-construction loan, is a secured loan designed for those who want to build a house/property on a plot or land they own. The loan amount varies across banks but is usually up to 70% of the total construction cost. Like home purchase loans, construction loans come with fixed or floating interest rate.

For construction loans, the loan amount is disbursed in a staggered manner basis of the stages of construction. The tenure is similar to that of home loans.

Construction Loan vs Home Loan: A Quick Comparison

Let's do a quick comparison between construction and home loan for a better understanding. 

Scenarios Where Construction Loans are Preferred

1. Building a Customised Home

   If you have a specific vision for your dream home and want to customise every aspect of it, a construction loan is a suitable option. It allows you to build a house according to your preferences without compromising on design elements.

    

2. Renovations or Additions

   If you already own a property and want to renovate or add additional structures to it, a construction loan can finance these projects. From expanding your living space to remodelling your kitchen, a construction loan can help you transform your existing property into your dream home.

    

Example: Mr. Sharma wants to add an extra floor to his existing house to accommodate his growing family. By opting for a construction loan from Ujjivan SFB, he can access funds at each stage of the construction process and fulfill his renovation plans seamlessly.

Scenarios Where Home Loans are Preferred

1. Ready-to-Move-In Homes

   If you are looking for immediate possession of a property without the hassle of construction, a home loan is the ideal choice. Whether it's a brand new apartment or a resale property, a home loan provides the necessary financing for your purchase.

    

2. Time Constraints

   If you have a limited timeframe to purchase a property, such as when relocating for work or personal reasons, a home loan allows you to expedite the process. With the entire loan amount disbursed upfront, you can quickly finalise the purchase and move into your new home.