Decoding construction loans – What you need to know

Decoding construction loans – What you need to know

We explain the important riders in construction loans and how you can make the most of them to build your dream house.

Is there ever any person who doesn’t wish to have their own villa outside the city? Thanks to easy funding options, scores of people today are buying plots of land to build houses on. But the construction loan that you require to finance this long-standing dream can have some hidden attributes that you are currently unaware of.

This article explains how construction loans work.

A room with a view…

Leading banks and housing finance companies in India offer construction loans to both resident and non-resident Indians. However, there are a few parameters within the construction loan spectrum that you must be aware of, such as –

* Your eligibility determines the loan amount. You can get an estimate drawn up basis the cost of the land and the cost of constructing a house on it. But you can finance your dream home only when you have adequate construction finance to back it up. Start by checking your eligibility and also calculate the home loan EMI to know the loan amount and the future expense every month, respectively.

* Get the project estimates drawn by experts. The loan amount is determined not just by eligibility but also by the project estimates and plans that you submit to the housing finance company. Get an experienced architect and team of engineers to draw up the estimates, to include costs of building the foundation, plinth, laying the services (plumbing, electrical, heating, drainage), wood work, civil work, etc.

* Disbursement. The disbursement of the construction loan is a little different from that of the home loan or loan against property. The housing finance company does not disburse the entire amount at one go, but in stages as per the progress of construction. Also, if you have purchased the plot of land just a few months before applying for the construction loan, then the land cost is also counted in the loan amount. But if you had purchased the land more than a year before applying for the loan, then it is not counted in the loan amount – so do factor this element in when making your calculations.

* Interest rate is all-important. The current interest rates on construction loans are higher than those on home loans, so comparing home loan rates with construction loan rates is like comparing apples with oranges. Instead, take a look at current interest rates on construction loans across leading banks and housing finance companies in India – a loan aggregator site can give you this data. Look for lower rates of interest so that the loan becomes more affordable.

* The timing is crucial. The trend of current interest rates on construction loans will determine when you apply for the loan. For example, it is a good idea to lock in the loan immediately if you anticipate that rates will rise in the next few months. Or if the rates are set to reduce, opt for a floating rate so that you can get an EMI adjustment at a later date.

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