What Are Home Construction Loans and Interest Rates of House Construction Loan
Home construction loans are secured loans used to build a new house on a vacant plot. Be it the expenses related to construction planning or finally executing those plans, you can utilise the funds to cover all of it. Moreover, due to its secured nature, you can expect the interest rates to be affordable.
Home Construction Loan Interest Rates
Here are the various new home construction loan rates offered by reputed banks in India:
| Name of the Bank | Rate of Interest |
| Navi | 8.39% onwards |
| HDFC Bank | 8.60% onwards |
| Axis Bank | 8.55% onwards |
| SBI | 8.40% onwards |
| ICICI Bank | 8.90% onwards |
How to Apply for a Home Construction Loan?
One must follow these steps to apply for a home construction loan via online mode:
- Step1: Visit the portal of housing finance companies or banks offering these loans.
- Step 2: Register yourself on the portal by completing the registration process.
- Step 3: After this, you need to click on the option to apply for a home construction loan.
- Step 4: In the next step, complete the e-KYC process and upload relevant documents.
- Step 5: Enter the loan amount and repayment period.
- Step 6: The final step involves submitting your application. After this, the institution will start the processing of the loan application and disburse the funds after approval.
You can also visit the physical branch of an institution providing a home construction loan and apply for it. You need to fill out the application form and submit hard copies of the documents. After all the formalities are completed, banks will scrutinise your application before disbursing the loan.
Features of A Home Construction Loan
Here is a list of features of a home construction loan:
- Long Repayment Tenure
Choosing a longer repayment tenure is a great way to lower your EMIs. Even though these loans are taken on a short-term basis, most financiers offer a repayment tenure of up to 25 years to help borrowers lower their EMI burden. This way, you get to manage your EMIs while fulfilling other financial liabilities smoothly.
However, you must know that going for a higher tenure means the interest outgo will increase too. Make sure to go through the amortisation schedule and then decide. - Availability of Tax Benefits
One of the key advantages of a house construction loan is that you get to avail of home loan tax benefits of up to Rs. 3.5 lakh per annum on loan repayments. - Fast Disbursal
New Home construction loans generally come with a quick turnaround time feature. So, when you have the plan for your new house ready with you, you will not have to wait for a long time to arrange funds. After submitting the application, you can expect to receive the funds within a few days. - Balance Transfer Facility
Just like home loans, this particular form of credit comes with a refinancing facility that helps you get better terms. Most lenders offer such benefits along with the convenience of avail of a top-up loan in addition to the existing loan. In case you are running out of funds, you can utilise this top-up loan amount to meet additional house construction expenses.
Other than these, access to a sizeable loan amount, flexible home loan repayment options, etc., are additional features this form of financial assistance comes with. However, make sure to compare different lenders and the house construction loan rates they are offering before settling for a particular loan provider.
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Benefits of A Home Construction Loan
Here are some of the essential benefits of taking a home construction loan:
- Tax deductions
One of the biggest advantages of a home construction loan is that one can claim tax deductions on the principal and interest amount. The principal component of EMI repayments is eligible for tax deductions under Section 80C. Repayments of interest for home construction loan EMIs can be claimed as tax deductions under Section 24 of the IT Act. - More economical
Another benefit of a home construction loan is that it saves money for the borrower. If one is building a home on his/her own, he/she can save money on many aspects like labour and raw material costs. This is because buying a house from a builder can be quite expensive since they have a markup on everything. - Instant equity
Building a home will allow individuals to create instant equity. If they invest in any FD or a savings plan, it may take up to 10- 15 years to create some sort of equity. However, in the case of home construction, they can generate value relatively quickly and on a larger scale.
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Eligibility Criteria for A Home Construction Loan
In order to make the most of these features and benefits, you need to meet the eligibility requirements first. Here are some basic parameters of a house construction loan you should be aware of:
- Applicants should be aged between 21 and 70 years to qualify for this particular loan.
- Both salaried and self-employed individuals can apply for this loan; however, there can be certain lender-specific requirements depending on one’s nature of work.
- The CIBIL score needs to be at least 750 to be eligible for house construction loans.
Apart from these, some lenders might have additional requirements as well. Those parameters generally vary from one loan provider to another. Before submitting your application, make sure to go through the requirements on the portal.
Documents Required for A Home Construction Loan
Here are the documents required for construction loans:
- Age proof
- Income proof
- Bank statements (last 6 months)
- Address proof
- Duly-signed loan application form
- Land or property-related papers
- Estimated cost quotation of the house construction
Along with these, both salaried and self-employed applicants might need to provide some additional documents based on their profile and requirements. After meeting eligibility criteria and furnishing all these required documents, lenders decide on the loan amount and house construction loan interest rate.
Factors Affecting Home Construction Loan Eligibility
You already know which eligibility criteria you need to fulfil in order to get a house construction loan. However, you also should be aware of the aspects that can affect your eligibility and lower your chances of getting the loan. Note that the rate of interest your preferred lender is offering might also change on the basis of these factors.
The factors are as follows:
1. Employment
As mentioned earlier, lenders generally have specific requirements for salaried and self-employed applicants. Depending on your monthly income, they will decide how much they can sanction to lower the risk of default on loan repayment.
Some financiers ask for at least 2 years of work experience in the case of salaried individuals, while self-employed applicants need to have at least 3 years of business vintage to qualify. Make sure to meet the lower limit or have more experience to easily qualify for the loan.
2. Credit Score
Having a low credit score and poor repayment track record is harmful to your loan eligibility. Lenders evaluate this score to understand how you have managed your past EMI payments, whether you have made timely payments or not, etc.
Look out for these factors and meet the requirements to increase the chance of getting prompt approval from your lender.
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Factors to Consider before Getting a Home Construction Loan
One must consider the following things before going for a home construction loan:
- Interest rate
An interest rate payable on a home construction loan is the primary thing for a borrower to consider. One must do thorough research on the prevailing market rates and compare the interest rates offered by different lenders before opting for a loan. This will help him/her get a good deal. - Processing fees
Every loan approved by lenders comes with a processing fee. Different banks and other financial companies charge different processing fees, which usually range between 0.5% to 1% of the total loan amount. One must consider this fee levied by banks and institutions as it will increase the total cost of borrowing. - Prepayment charges
Another important thing that one must consider is the prepayment charges. These charges are levied by banks when one opts to partially repay his/her loans. People prefer to foreclose their loans after a certain period passes away as it allows them to be debt-free earlier.
Therefore, one must consider these charges and go for that loan which comes with zero or minimum prepayment charges. - Loan tenure
The loan tenure is also an important factor to consider while going for a home construction loan. One must choose an ideal loan tenure as per his/her repayment capacity.
Longer tenure will mean paying a higher interest amount but less burden of monthly EMIs. On the other hand, shorter tenure will have very high EMIs and hence could be burdening for borrowers.
Final Word
The cost of raw materials required for construction has been increasing with every passing day. Accordingly, constructing a house has become challenging from a financial standpoint. However, thanks to reduced house construction loan interest rates, you can now meet the cash requirements and build your dream home. Make sure to keep the aforementioned pointers in mind before going ahead.
FAQs
Ans: It is not necessary to have a co-applicant when you are trying to avail a house construction loan. However, in case the concerned land has multiple owners, you must include them as co-applicants while availing the loan.
Ans: Both Section 24 and Section 80C of the Income Tax Act, 1961 deal with tax benefits on house construction loans. Apart from these, for first-time home buyers, additional benefits are available under Section 80EE of ITA. However, in that case, the total value of the house must not exceed Rs. 50 lakh.
Ans: The amount that you need to submit as a down payment for a house construction loan depends on both you and your lenders. Some loan providers ask for 20% of the total loan amount as a down payment, while some lenders may allow up to 25%.
Ans: Borrowers receive the home construction loan amount in parts. Lenders release the sum on the basis of the progress of the construction. The same process is applicable in case one avails such a loan for an under-construction flat.
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Disclaimer: This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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