- What is An Under – Construction Property?
- Home Loan Interest Rates For Under Construction Property 2024
- Benefits of Under Construction Home Loans
- Loan Application and Approval Process
- Home Loan Disbursal and Pre-EMI for Under-Construction Properties
- Difference Between Home Loan and Under Construction Home Loan
- Downsides of Under Construction Home Loan
- Conclusion
- Frequently Asked Questions
Thinking about getting a home loan for an under-construction property? You’re in the right place! Buying a home excites everyone, and when it’s being built just for you, it feels even more special. In this blog, we walk you through the ins and outs of securing a home loan for an under-construction property. We cover what makes these loans unique and provide tips on navigating the application process smoothly.
What is An Under – Construction Property?
Under-construction properties refer to homes that builders are still constructing. Home loans for these properties cater to the unique needs of financing a property that isn’t yet complete.
Unlike traditional loans for ready-to-move-in homes, these loans are disbursed in stages. The loan payments are released incrementally, corresponding to the progress of the construction.
This ensures that the funding aligns with key milestones of the building process, providing a structured financial approach to building your future home.
Home Loan Interest Rates For Under Construction Property 2024
Bank/ NBFC | Interest Rates |
---|---|
Bajaj Housing Finance | 8.50% onwards |
SBI | 8.75% onwards |
HDFC | 9.00% onwards |
ICICI Bank | 9.20% onwards |
Bank of Baroda | 8.40% to 11.10% |
Bank of India | 8.40% to 10.85% |
Bank of Maharashtra | 8.35% to 10.40% |
Benefits of Under Construction Home Loans
Aspects | Benefits |
---|---|
Staged Disbursement | a. Lenders disburse loan in installments based on construction progress b. Ensures appropriate use of funds throughout the building process |
Pre-EMI Interest | a. Borrowers pay only interest on disbursed amount until property completion b. Lowers financial burden during construction phase |
Flexible Loan Tenure | a. Offers repayment tenures up to 30 years b. Borrowers can choose a plan that suits their financial situation |
Tax Benefits | a. Claim tax deductions on interest paid during pre-construction period b. Deductions available in five equal installments from the year of construction completion |
Higher Loan Amounts | a. Lenders provide higher loan amounts for under-construction properties b. Accounts for the nature of expenditure |
Linked to RERA Guidelines | a. Disbursements linked to compliance with RERA guidelines b. Ensures construction milestones are met before further fund release |
Loan Application and Approval Process
- Application Submission: Begin by submitting your home loan application along with necessary documents. These typically include identity proof, address proof, income documents, and detailed information about the property you intend to purchase.
- Legal and Technical Verification: The lender will conduct thorough checks on the property’s legal documents and perform a technical evaluation of the construction project. This step is crucial to assess the viability and legal status of the property.
- Loan Agreement Signing: Once your loan is approved, you’ll be required to sign a loan agreement. This document details the loan terms, including the disbursement schedule and interest rates, and legally binds both you and the lender to the agreed terms.
- Disbursement Request: To initiate disbursement, you must submit a request form along with a demand letter from the builder. This letter should specify the current stage of construction and the corresponding amount needed.
- Loan Disbursement: The lender disburses the loan amount in staged installments directly to the builder’s account. This ensures that the funds are specifically used for the ongoing construction.
Home Loan Disbursal and Pre-EMI for Under-Construction Properties
Step 1: Loan Sanction and Approval
- Receive Approval: Once the lender sanctions and approves your home loan, you move into the disbursal phase.
- Arrange Disbursal: For under-construction properties, lenders do not disburse the entire loan amount at once.
Step 2: Staged Disbursal Based on Construction Progress
- Disburse in Parts: Lenders release the loan amount in stages, matching the completion milestones of the construction project.
- Make Direct Payments to the Builder: The lender pays the builder directly as each construction stage completes.
Step 3: Pre-EMI Payments
- Begin Pre-EMI: You pay Pre-EMI during the construction phase, covering only the interest on the disbursed loan amount.
- Explain Pre-EMI: Pre-EMI is the interest on the amount the lender has released.
- Provide an Example: For instance, if the lender disburses Rs 3 lakh initially from a total Rs 30 lakh loan at an 8% annual interest rate, your monthly Pre-EMI would be Rs 2,000.
Step 4: Incremental Increase in Pre-EMI
- Increase Pre-EMI with Additional Disbursements: As the lender releases more funds and construction progresses, your Pre-EMI payment increases.
- Continue the Example: If the lender disburses an additional Rs 3 lakh after six months, your Pre-EMI would increase to Rs 4,000 per month.
Step 5: Transition to Full EMI
- Complete Construction: Once the builder completes the property construction, the lender disburses the full loan amount.
- Initiate EMI Payments: You then start paying regular EMIs, which include both the principal and interest components.
Step 6: Optional Early EMI Payment
- Opt for Early EMI Payments: You have the option to start paying full EMIs immediately after the first disbursement.
- Notify the Lender: Inform the lender if you choose to start full EMI payments right from the beginning.
Difference Between Home Loan and Under Construction Home Loan
Aspect of Differentiation | Home Loan | Under Construction Home Loan |
---|---|---|
Disbursement | Usually disbursed in a single lump sum to the seller | Multiple disbursements spread over the construction period |
Interest Calculation | Interest is calculated on the full loan amount from day one | Interest is calculated only on the disbursed amount, potentially leading to lower initial payments |
Repayment Structure | Full EMIs (principal + interest) typically start immediately | Often offer pre-EMI options where you only pay interest on the disbursed amount during construction |
Risk Management | The property serves as immediate collateral | The lender’s risk is managed through staged disbursements, aligning their exposure with the increasing value of the property |
Flexibility | Less flexibility in fund utilization | Allows for better cash flow management for both the borrower and the developer |
Monitoring and Verification | Minimal ongoing monitoring required | Regular site visits and progress verifications by the lender |
Duration | Quick, often completed within days of approval | Stretched over months or years, depending on the project timeline |
Downsides of Under Construction Home Loan
While investing in an under-construction property can be advantageous, it’s important to be aware of the potential risks and considerations:
- Project delays: Construction can face unexpected setbacks, impacting your move-in date and financial planning.
- Builder credibility: Research the developer’s track record and financial stability before committing.
- Changing market conditions: Property values and interest rates may fluctuate during the construction period.
Conclusion
Securing a home loan for an under-construction property in India isn’t just about getting the finances—it’s a strategic decision that can save you money and lets you witness your dream home coming to life.
Ready to take the first step towards your new home? Connect with Credit Dharma for expert guidance. We provide free consultation calls to help you find the best under-construction home loan tailored to your needs.
Frequently Asked Questions
Yes, you can switch from a pre-EMI to a full EMI during the construction phase. Some lenders offer the option to start paying full EMIs even if the loan disbursal is being done in stages. This means you would begin paying both the principal and interest from the start, which can help in reducing the overall interest burden in the long run.
You can claim tax benefits on the interest you pay for a loan on an under-construction property, but only after the completion of the construction. You must aggregate the interest paid during the construction phase and can claim it in five equal installments starting from the year you take possession. However, you cannot claim tax deductions for principal repayments made during this phase.
Yes, there may be additional charges for loans on under-construction properties. These can include processing fees, legal charges, and charges for the disbursement in stages. It’s crucial to check with your lender about any such fees before opting for the loan.
If the construction project is significantly delayed, you may encounter several challenges. These include the need to continue paying pre-EMI or full EMI without the benefit of possessing the property, an increase in total interest costs, and potential financial strain from extended rental payments, if applicable. Some lenders might offer moratorium periods or restructure the loan, depending on their specific terms and policies. It is wise to include penalty clauses in your purchase agreement to safeguard against such delays.