Anish was looking for funds to expand one unit of his ancestral home. He had extensive construction plans drawn up and approached his bank for a home loan. To his surprise, his bank approved a home extension/ renovation loan and not a home loan. Anish was surprised with this development since he didn't know such type of loans even existed.
Anish was looking for funds to expand one unit of his ancestral home. He had extensive construction plans drawn up and approached his bank for a home loan. To his surprise, his bank approved a home extension/ renovation loan and not a home loan. Anish was surprised with this development since he didn't know such type of loans even existed.
Home loans are a very common debt product that several people avail to fulfill their dreams to own their own house. However, awareness on home extension/ renovation /construction loans is not common. Many people tend to opt for personal loans instead of home renovation/ extension/ construction loans.
A home-construction loan broadly is a product that is specifically given to meet the costs of home renovation, construction or extension. Some of the terms and conditions are very similar to a home loan. To understand which loan should be taken for what purpose, it is best to analyse both these types of loans.
Similarities and differences between home loan and home-construction loan are as follows:
Value of loan
Home loan depends on the value of the property that is to be purchased. Home construction/ renovation/ extension loan on the other hand, depends on the cost of such expense which is procured from a certified civil engineer /architect. In a home loan plan approvals are sought by the developer/ seller.
Borrower eligibility
Both home loans and home-construction loans are given out to borrowers who have a good credit history, proof of sufficient income, credit score, employment details etc. Loan eligibility is based on Loan to Value Ratio, that is, the cost of property/cost of construction, income of the borrower, etc which would establish the repayment capacity.
Tenure
Both home loans and home construction loans have longer tenures They are typically given out for a max tenor of 15-20 years depending upon the age of the borrower.
Type of lender
Any home loan product can be extended by Housing Finance Companies and Public Sector Banks, regulated by national Housing Bank/ Reserve Bank of India respectively.
Security
Both in home loans and home-construction loans, the loan is secured by way of equitable mortgage of the property being purchased/ constructed/ renovated. All such properties are technically appraised by civil engineers to ascertain the cost and finally the value of loan.
Rate of interest
The rate of interest for both kinds of loans is similar in nature and it depends upon the cost of fund for the financing company
Fund disbursal
In case of home loans depending on the kind of property being purchased funds are transferred. For example, in case of ready property being purchased the entire amount is given to the seller at the time of the transaction/ transfer of property. In case of the property being under construction, that is, being purchased from a developer, then funds are disbursed in tranches depending upon the stage of construction. When it comes to construction/ renovation/ extension funds are necessarily disbursed based on stage of construction and is handed over to the borrower based on progress of such activity.
Which loan should you opt for
Home loan is availed for the purpose of acquisition of property which can either be a ready property or purchase of under construction property. On the other hand, home-construction loan is for self-construction on a self-owned plot/ extension on existing property/ renovation of existing property. Hence, depending upon the need and requirement the kind of loan can be selected.
Other factors to be considered
Once the basic purpose of the loan is established, the borrower should look for the following factors:
Rate of interest being charged
Tenure of Loan
Fees being charged
Percentage of loan extended against cost being incurred
Availability of subsidy under Prime Minister Awas Yojana – Credit
Linked Subsidy Scheme (if applicable)
Foreclosure charges for part/ full prepayment
The writer is chief business officer of Aadhar Housing Finance
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