A home construction loan is a long-term credit facility that provides you with ample funds for the construction of your residential property. The unique feature of this credit facility is that the loan disbursements occur in the form of instalments – as per the financial requirements of a borrower.
The nation’s real estate sector is at its peak. You can cash in this real estate boom by constructing a house of your own. Starting from planning to buy a property to its execution – a home construction loan covers all your diverse expenditures effortlessly. So, if you are considering availing this advance in the near future, here are some of the aspects to look into.
[A] Loan disbursement process
The sanctioned loan amount is usually disbursed in 2 to 5 installments – based on the progress of your home construction, LTV ratio and loan amount. So, borrowers need to ensure they procure adequate funds for purchasing raw materials to start the construction process.
If you require a lump sum loan amount for home purchasing, you can opt for a home loan instead, which will provide you with a substantial sum of up to Rs. 3.5 Crore.
Also, make sure you use a home loan eligibility calculator to determine if you qualify for such advances.
[B] Disbursement is linked with the construction progress
Financial institutions have pre-determined criteria for disbursing funds as per the progress of the construction activity of your house.
For instance, if a borrower takes up to 75% of estimated construction cost as an advance, the final home loan disbursement will only take place after the completion of the foundation work – assuming that 25% of the estimated cost.
[C] Applicants must pay pre-EMI monthly
In case of a home construction loan, borrowers need to pay pre-EMIs, until the complete loan amount is disbursed. Hence, a borrower is paying interest only for the disbursed amount under each EMI. Note that, this amount will not be utilised into repaying the principal credit amount.
So, even if the construction activity is suspended for a period, borrowers still have to continue paying interest to the financial institution. Hence, use a loan EMI calculator to compute the monthly outgo and fix your budget accordingly.
[D] Limited tax benefits
Unlike your conventional housing loans, home loan tax benefits for an under-construction property are applicable only on the interest paid, and not on the principal component. This means, if you opt for this tranche EMI option, you will not receive any tax benefits on principal portion paid, until the home construction gets over.
[E] Interior construction might not be included
Loans for home construction cannot be availed for interior work in your home like partition works, plumbing, electrical wiring, etc. Nowadays, interior works on a small scale can cost you around Rs. 3 to 4 Lakh. Depending on your luxury preferences, it can level up to Rs. 50-60 Lakh or even more. So, make sure to check with your lending institution about the exclusions on such credit facility.
Knowing all the terms and conditions of a home construction loan is crucial for avoiding last-minute cash crunch or loan rejection. Following these tips will help you to avail such advances without a hassle.