Before borrowing home construction loan know the pitfalls

Last Updated : March 3, 2020, 12:46 p.m.

Do you agree that borrowing a home construction loan is not that simple? If your answer is no, then before you land into a foul soup of home construction loan you should know more about it. Borrowing a home construction loan is a bit complex as compared to borrowing a home loan. In home loan you will get the whole loan amount in one installment, but in home construction loan you will get the amount disbursed in two to five different phases as per the completion level of the construction work. However, it sounds more exciting and satisfactory that you will build your home and at the same time build an equity in a shorter duration. But, availing a loan to give a kick start to your dream project is not as simple and  has some drawbacks as well. Most of us at the time of availing the loan don’t consider much about the pitfalls or disadvantages related to the home construction loan or any other loan. But, it is equally important to understand the product or the loan in detail along with negative points to manage it better. Borrow a loan once you are fully satisfied with the terms and conditions of the loan along with pitfalls linked with it. Here are some pitfalls linked with home construction loan, which one should consider before borrowing it.

Complex and longer process: Availing a home construction loan is a complex and longer process as compare to home loan. Usually, in home loan you will get the whole amount disbursed in one phase and you are supposed to submit the basic property documents along with your KYC documents. But, in home construction loan you are required to submit various papers related to your plot, it’s legal approval from the local authorities, a home design layout created and approved by a civil engineer or an architect. Moreover, the home construction loan is not disbursed in one installment, but in most of the cases you receive the loan amount in two to five different phases.

Increased cost: If you will borrow the home construction loan, it will increase your overall cost of home construction. As you are supposed to pay the loan amount along with interest of the loan. For instance, if you will borrow the loan of Rs. 10 lakhs and your total outgo as interest on the loan for the whole tenure is Rs. 8 lakhs that means the actual cost of your home construction loan is not Rs. 10 lakhs, but Rs. 18 lakhs. Therefore, you should not consider the amount you will borrow as loan, but the total outgo, which you will pay in the form of principal amount along with interest. It will increase the total construction cost along with other expenditures.

Long-term commitment: Borrowing any kind of loan is a long-term commitment. Whichever home related loan you will borrow you will avail it at least for 10 years or more. So, during that period you will block a share of your monthly income against the repayment of the loan, which you have to make religiously for the whole tenure of the loan. You can’t use that money for investment or for anything else. Therefore, before jumping into the loan part, always keep that in mind that you will increase your financial burden till the loan last.

Higher rate of interest: The higher rate of interest linked with home construction loan makes it more difficult. Generally, banks offer different rate of interest to different customers. If your eligibility is lower, still the bank gets ready to offer you loan in that case, it will offer you loan on a higher rate of interest keeping the risk factor in mind. Therefore, if you have a bad credit score with lower eligibility, then get ready to pay higher rate of interest on your loan. Even if you will borrow the loan from any non banking financial companies, they will also charge you higher rate of interest against your loan.

Lower tax benefits: If you will avail a home construction loan, then like home loan you can’t claim the tax benefits for the interest amount you paid against the loan. Moreover, you can’t claim the tax benefits till the time you will not deposit the construction completion certificate to the bank. If your construction work will last for one year or more than one year, in that case you can’t claim the tax benefits until you will not complete the whole construction of your home even if you are paying the interest part during the construction phase.