Home Construction Loans and Its Interest Rates

Are you planning to build your dream home? A home construction loan can help make your dream a reality. It is a short-term loan used to finance the construction of a new home. The loan is typically used to pay for the land, materials, and labour needed to build a property. Home construction loans usually have better interest rates than traditional mortgage rates but can often be more challenging to qualify.

Home construction loans are available through banks and financial institutions, including credit unions and payday lenders. A common requirement for getting a loan is that the borrower has some savings or another form of income to cover living expenses in absence of no regular pay.

You can use a home construction loan to finance the construction of an energy-efficient home. This helps you save money on utility bills and make your appreciate your home value. If you’re considering a home construction loan, seek and compare the interest rates and terms from different lenders. You can also talk to a financial advisor to get more information about home construction loans.

Read more about Top Home Loans for 2022

Features and Benefits of Home Construction Loan

Many people are uninformed that fixer-uppers have become an excellent deal for those with money. Home construction loan programs offer instant and generous credit for homeowners to fix their property without necessarily having to purchase an expensive condominium or a new luxury development. The primary features and benefits of home construction loans are outlined below:

Tax Benefits

Home construction loans can provide excellent tax benefits if you plan to build a new home. A borrower can claim tax exemptions and deductions under section 80 C and section 24 (b) on principal and interest payments, respectively. Talk to your financial advisor for an in-depth understanding.

High-Value Loans

Loan to value ratio is a financial term used by lenders to express the ratio of a loan to the value of an asset. In terms of home construction loans, LTV is the ratio of the loan amount to the value of the property. It is a crucial factor in mortgage lending and can significantly impact the terms of a loan. Usually, banks and NBFCs, offer construction loans of up to 70% to 80% of the property’s value.

Balance Transfer Facility

Balance transfer loans are a type of loan which allow you to transfer the balance of your current loan to a new loan with a lower interest rate. This can save you money on interest charges and help you pay off your debt faster. The majority of lending institutions offer balance transfer facilities on home construction loans.

Top-up Facility

A home loan top-up is an additional loan that can be taken on your existing home loan. It can be used for various purposes, such as home renovations, debt consolidation, or other major expenses. Banks are offering top-ups on their home construction loans to optimize their loan experience.

Best Home Construction Loans

While home construction loans are a healthy financial tool, finding the best home construction loan can be challenging. There are many different lenders out there, each with its own terms and conditions. It can be difficult to compare all the options and choose the one that’s right for you. To clear the clutter, we’ve compiled a list of some of the best home construction loans available. You can easily compare your options and choose the one that’s best for you. Here’s a look at some of the most popular Home Construction Loan providers:

State Bank of India

The State Bank of India (SBI) is the largest bank in India, with over 24,000 branches across the country. It is also one of the oldest banks in the world, dating back to 1806. The bank offers various products and services, from savings and current accounts to loans and credit cards.

HDFC Bank

HDFC bank is a private Indian banking and financial services company headquartered in Mumbai, Maharashtra. The bank has a strong network of branches and ATMs across the country and provides a wide range of digital banking services.  The bank offers personal banking services like loans, credit cards and other financial products to individual customers. It also provides wealth management solutions through its subsidiaries – HDFC ERGO Insurance Company Limited (HEIC), which is a joint venture between HDFC Ltd.

HDFC bank offers affordable home construction loans along with balance transfers and a top-up facility. The bank provides home construction loans at a nominal rate ranging from 6.75% p.a.  Additionally, the bank offers a concession of 0.05% on interest rates for women borrowers.

Punjab National Bank (PNB)

Punjab National Bank is a nationalized bank established in 1894. The bank has more than 11,000 branches and over 55,000 employees. PNB provides a full range of banking services to both retail and corporate customers. In addition to traditional banking services, the bank offers credit cards, loans, and investment products.

LIC Housing Finance Limited

Life Insurance Corporation of India (LIC) is one of India’s oldest and largest insurance companies. LIC is a government-owned company, and it enjoys certain advantages over private life insurance companies. Established in 1989, LIC Housing Finance Limited is a subsidiary of LIC. LICHFL offers affordable home loans to home buyers.

Eligibility Criteria

The eligibility criteria varies for individuals falling under different categories. They are discussed below:

Salaried Individuals

Self-Employed Individuals

 Documents Required

The documents pertaining to home construction loans varies for individuals falling under different categories. They are tabulated below:

Salaried Employees

 Self-Employed Individuals

What Kind of Loan is Best for Construction?

One-time-close loans and two-time-close loans are the two primary categories of home construction loans. In all construction loans, the lender will distribute funds by a predetermined draw schedule, i.e., a certain amount upon completion of the home, a different amount at completion of the preliminary frame, etc. The objective is to only pay for the finished work, which is 10% of the overall home construction cost. The amount is withheld until everything is finished as per the predetermined schedule and the owner receives a certificate of occupancy (CO).

Payments provided in home construction loans are interest-only, i.e., you only pay with money that has already been dispersed. You make a significant payment for the entire balance due once the construction is finished. Some loans don’t require repayment until the house construction is finished.

One-time close and two-time close construction loans are the best if you are looking forward to securing a house construction loan. Here is what you must know about these construction loans:

One-Time-Close House Construction Loan

Consumers prefer this construction credit the most, but it is currently hard to find in some places. These loans combine the construction loan and the housing finance on the finished project and are sometimes known as “all-in-one loans” or “construction-to-permanent loans.” Since the terms of these loans are difficult to change, it is better to use them when you have a firm grip on the design, expenses, and schedule.

The loan has a single approval procedure and closure that streamlines the process and lowers closing expenses. There are numerous modifications within this fundamental framework. The interest rate for construction loans is usually greater than on permanent finance.

The borrower often has access to the lender’s portfolio of mortgages, including 30-year fixed or different adjustable rate mortgages. For a price, some banks will let you lock house construction loans at a fixed rate through a “float-down” option. It will allow you to acquire a lower rate if the repo rate decreases.

Advantages

• The borrower will have to pay only one set of loan closure costs.
• You receive approval for both construction and long-term financing at the same time.
• Multiple permanent financing alternatives give you flexibility.

Disadvantages

• You could need to get a second loan and pay higher closing charges if your spending exceeds the construction mortgage.
• The borrower might have to pay higher rates compared to a two-time close loan.

Two-Time-Close House Construction Loan

In reality, a two-time-close loan consists of two independent loans. One is a short-term loan that the borrower secures for the project’s development phase, and another is a subsequent permanent mortgage loan for the finished product. Once the construction is complete, you are essentially refinancing, which requires a new application, approval, and closing expenses. Your payments will start small but increase as more amount is dispersed during the construction phase since you will only be paying interest on the money that has already been dispersed. The lender may restrict the loan term for 12 months, after which penalties will apply.

Typically, the bank would include a 5% to 10% contingency sum to account for cost overruns, which are too common on house construction projects. It is recommended to secure the maximum possible loan amount. You can consider these house construction loans as a handy line of credit which can be easily used if and when needed.

Closing expenses for this type of loan will be higher due to two loan settlements. However, since you will secure a loan with mortgage refinance rates, it will be more affordable than the rates provided in one-time-close loans. With two-time-close loans, you will acquire a better rate on the permanent mortgage.

Advantages

• More freedom to change the project plan and surge the loan amount as the project progresses.
• Compared to one-time-close loans, mortgage rates are frequently lower.
• You have full reign to secure any of the available permanent financing options.

Disadvantages

• Closing fees must be paid twice, and you must receive two approvals.
• You might face foreclosure if you don’t get approval for permanent financing.

How Can One Apply for Home Construction Loans?

A thorough analysis is necessary to gauge the financial obligation induced by home construction loans. Individuals can apply for home construction loans in the following way:

Select the Lender

The first step is to find a lender that offers home construction loans. There are many factors to consider when selecting a lending institution for a home construction loan. The most important factors include interest rates, fees, loan terms and conditions, and customer service. It’s important to look around and compare the interest rates and fees from different lenders before deciding.

You should also understand the loan terms and conditions before signing anything.

Customer service is also an important consideration. You should ensure that the lender you choose is easy to communicate with and responsive to your needs. Take your time and do your research to find the best lender for your home loan.

Fill in the Application

Once you’ve found a lender who suits your requirements, you’ll need to fill out the application form. Fill in all the details and attach the documents specified by the lending institution. Make sure you are aware of the terms and conditions of the loan.

Verification Process

Once you submit the application form and the documents, the lending institution will review your application and creditworthiness. Your financial standing and credit score will determine whether or not you’re approved for the loan. You’ll then need to sign a loan agreement once your loan is approved.

Disbursement

Once the loan agreement is in place, the loan will be disbursed, and the construction process can begin. Be sure to keep your lender updated on your progress, as they will need to make periodic inspections. Once the home is complete, you’ll need to make final payments on the loan, and then you’ll be all set!

Tax Exemption for House Construction Loan

The period between the date on which you borrow the loan and complete the house construction is known as the pre-construction phase. The Indian Income Tax Act lists certain conditions upon which a salaried employee can claim tax rebates on the interest payments made towards the home loan.

Section 24 of the Income Tax Act states, “if any property is still under construction, no tax deductions will be permissible on the interest payments for the under-construction period.” However, you can make the tax deduction towards the interest payment associated with the pre-construction period via five equal instalments. It will begin right with the completion of house construction.

Income Tax Deduction for Home Construction

According to the Income Tax Act, a taxpayer who has bought or constructed a residence is entitled to a deduction specifically from taxable income. The deduction may be claimed by taxpayers under Section 80C of the Act. The clause enables taxpayers to write off expenses in several circumstances. The deduction is available for sums paid by an assessor for the construction or purchase of a residential home. The tax deductions will be made from the gross income.

Deduction Under Section 80C

According to this Section, you may deduct the principal portion of your house construction loan. A deduction of up to INR 1.5 lakhs can be claimed once the construction of the property is completed.

In case you make up your mind to sell the property within five years of its possession, the benefits will be reversed, and the amount you deducted will be returned to your taxable income for the year of the sale.

Section 24 of the Income Tax Act

According to Income Tax Act – Section 24, you may deduct the interest portion of your home construction loan. Under this section, the most that can be deducted from self-occupied real estate is INR 2 lakhs.

For this deduction, your home construction must finish within a five-year tenure starting from the day the loan amount is sanctioned.  In any other case, you may claim deductions up to INR 30,000. The exemption amount is unconstrained regardless of the property’s completion status if it is not self-occupied.

80EE Section

You can take an additional INR 50,000 from the interest portion of the house construction loan if you are a first-time house buyer. Until you fully repay the borrowed amount, you are permitted to use this deduction once every fiscal year.

Both the loan amount and the value of the property must be less than INR 50 lakhs to be eligible for this benefit. Additionally, this tax benefit is available for the loans that were approved between April 1, 2016, and March 31, 2017.

Conclusion

The very first step to home construction loans is to find a lender that you are comfortable with. The lender that you choose is likely to work with you for years to come, so you want to make sure that they are credible and trustworthy. We hope you enjoyed our article about home loans for construction. With this knowledge, we know that you can make the most of your next home project and do it fast with your own money.