6 Points To Consider While Applying For House Construction Loan
House-construction loan is a type of home loan. However, it is different from other sorts of home loans. Here are the six major aspects which you must take into account if you are applying for a home loan for construction purpose.
House construction loans are disbursed in installments: The house loan amount gets disbursed in two-five installments depending on factors such as the size of the loan, the progress of construction and the loan-to-value (LTV) ratio. Therefore, ensure that funds are adequately available for buying the requisite materials to begin the construction on time.
Progress of the construction determines disbursement: If the construction is happening in a time-bound manner, the disbursement of the loan installments also happens in a time-bound manner. However, any delay in construction progress can result in delay or cancellation of disbursement of funds. This is because banks can only disburse funds according to the stage of construction.
Suppose the loan was taken for 85 per cent of the estimated construction cost. In this case, the first instalment will only be disbursed after the foundation work is completed. At the lintel level, the second disbursement will happen. When the concrete works is completed, the third instalment would arrive. The final instalment would be disbursed after 90 per cent of work is complete. If only 50 per cent of the value is taken as loan as the estimated construction cost, the first disbursement may only happen after the concrete works completion or the lintel work completion.
Pre-EMI will have to be paid: Until the final loan amount is disbursed, the borrower has to keep paying pre-EMIs every month. Interest has to be paid for the disbursed amount as part of every instalment. But, this amount is not part of the principal loan amount. Even in the event of suspension of the construction, the borrower has to keep paying interest to the bank which can be burdensome.
If the borrower opts for a loan of Rs 25 lakh at 10.5 per cent of interest and the bank has disbursed Rs 5 lakh, the borrower has to pay a pre-EMI of Rs 4,375 monthly. This figure comes to Rs 52,000 a year which is different from the outstanding loan amount.
Deviations from the plan approved are not included in disbursal: The bank has access to the entire construction plan. If there are any variations from the original plans, the bank will not disburse the installments and can also freeze your loan. Approval has to be sought from the bank in case of additional deviations and variations in the plans.
Tax benefits are different, too: If the construction activity is still in progress, the borrower can avail of tax benefits on the interest paid. However, the borrower can’t avail of tax benefits on the principal and interest amounts like in the case of home loans. But, if the borrower opts for starting the EMI after the disbursal of the first instalment or the Tranche EMI option, there is no tax benefit to be availed of on the principal portion paid on the loan until the construction is completed and the bank certifies that the full amount has been disbursed.
Interiors works are not included: It is necessary to understand that construction loans do not fund interior works of homes such as kitchen cabinets, furniture, interior decoration, plumbing, cupboards, lighting, partition works, etc. Any interior work nowadays costs three-four lakh and upwards. So, it is mandatory to check with the bank on the exclusions on the loan in order to avoid future hassles.