Home loans are loans availed of to buy a home. Home construction loans, on the other hand, are loans availed of for constructing a home or undertaking a refurbishment or repair job on your current residence. For this, you will have to apply for a home construction loan.
Home Construction Loans: Benefits and Drawbacks
Unlike home loans, home construction loans are not released in a single go. Along with construction home loan documents, loan applicants also have to provide a detailed construction plan along with proposed completion dates. Your lender will disburse the loan amount based on the various completion dates proposed by you. The biggest advantage of this way of releasing the loan amount is that you pay interest only on the amount that you are using.
Yet another benefit that home construction loans offer is that these loans come with tax benefits. Individuals who have availed of this loan can apply for home loan tax benefits under Section 24b of the Income Tax Act. The maximum limit for tax deductions is capped a Rs.2 Lakh under this section of the Income Tax Act. Further, one can claim tax deductions on payments made towards the repayment of the principal component of the loan under Section 80C. However, one can claim these tax deductions only after construction on a property is complete and the maximum limit is capped at Rs.1.5 Lakh under this section, irrespective of the number of home loans and home construction loans one has. Further, first-time homebuyers investing in affordable housing and meeting the other specified criteria can claim tax benefits under Section 80EE of the Income Tax Act up to a maximum of Rs.50,000.
Home construction loans also offer other benefits. For instance, while loan borrowers are required to pay a down payment even in the case of home construction loans, the down payment is not as high as it is in the case of home loans. This key feature makes availing yourself of a home construction loan slightly easier than home loans. Further, borrowers must also keep in mind that home loans are backed by security and therefore, lenders charge the best home loan rates for these loans. Home construction loans tend to be a bit higher. The best home loan rates start from 8.50% per annum whereas the best home construction loan interest rates start from 9.50% per annum. This slightly high rate of interest also automatically leads to slightly higher loan EMIs and therefore, loan repayment planning is important while availing of home construction loans. A house EMI calculator can help with budgeting and repayment planning as well as figuring out the ideal time for prepayments and home loan foreclosure.
Now that we are familiar with both the benefits as well as drawbacks of home construction loans, let us highlight some of the things that one must keep in mind while applying for a home construction loan. To start with, you should research lenders and reach out to as many lenders as possible. This will help you avail yourself of the lowest home construction loan interest rates you can get. Next, your credit score is as important to secure a home construction loan on beneficial loan terms and conditions as it is to secure a beneficial home loan deal. So, maintain a high credit score in the range of 750 to 900. Also, maintain a stable job and income as it will help you quell any doubts your lender may have regarding your creditworthiness and ability to pay loan EMIs on time. Lastly, make sure you have all the documents needed for a home construction loan ready with you. You can find the list of documents needed for these loans on your lender’s website.
Final Words
To sum up, home construction loans are a great option for those looking to build or repair their homes. They offer benefits such as lower down payments and tax deductions, but also require proper planning for loan repayments. By researching lenders, maintaining a high credit score, and having all the necessary documents, you can increase your chances of securing a beneficial home construction loan.
