Tips to Get a Home Loan For Under Construction Project

15 Dec 2020 // 32 min read // Home Loans
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Real estate market in India has been mostly stagnant since the past few years. But recently, the market has slowly picked up the pace, and consistently showing signs of improvement. The prices of residential properties in the major metros- be it for a ready to move in apartment or an under construction project, are attractive for buyers; looking out to buy their home or seeking out an investment opportunity with their savings.

In this article, we have compiled a user guide to Get a Home Loan for an under-construction property. Investing in an ongoing project can be a steal deal for a buyer as there is enough space for appreciation of the price of the project after completion.

LenderInterest rate (%)Processing fee
HDFC Home Loan

6.90%

Up to 0.50% of loan amount subject to maximum of Rs. 3000
SBI Home Loan

7.35%

0.50% of the loan amount (Minimum Rs. 2,000 and Maximum of Rs. 10,000) plus service tax
Indiabulls Home Loan

8.99%

Up to 2.00% of loan Amount
ICICI Home Loan

6.90%

0.50% – 2% of loan amount subject to maximum of Rs. 1500+ GST
L&T Housing Finance

8.80%

Processing fee for Home Loan is Up to 2% + taxes
PNB Housing Finance

7.90%

Up to 1% of loan amount
Bank of Baroda Home Loan

7.00%

Up to 0.50% of loan amount
Axis Bank Home Loan

7.45%

1% of the loan amount to a maximum of  Rs. 10000

Loan for an Under-Construction Property

When you finance a flat/apartment under construction, the builder is a direct beneficiary of the amount sanctioned as a Home Loan by the bank. The customer or the actual buyer need not pay any EMI until the house is ready for possession. The builder or the developer of the project is liable to pay “interest” on the Principal Loan Amount until the customer receives the possession of the property.

This is highly convenient for the customer as they need not pay inflated EMIs for the Home Loan while living on rent. The agreement between the bank or financing institution and the builder is a separate legal procedure wherein certain landmarks are defined. Usually, the bank decides to disburse the amount as per the progress of the property.  And this makes your investment quite safe and easy for the pocket.

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Pre-Requisites before Availing a Loan for Under-Construction Property

In addition to the information which gives you an idea of how exactly a loan for under construction properties work, here are some tips that would help you in navigating through the different intricacies that are involved in the process:

1. Carry out thorough & frank negotiations with the builder/developer:

Usually, whenever a builder quotes for a price at the initial stage, they might appear inflated to you. So as per the location and the market trends in and around that area, make sure you try and bargain thoroughly to ascertain that the best possible deal is provided to you. You can consider accessing online portals and gain lesser known insights of the precise location, property and near-by projects.

2. Convenient Payment Schedule:

It is important to note that the builder might offer you a repayment structure according to a schedule as per his estimates. This is also negotiable from your end. Make sure you are not paying the bulk of the payment even before the project is completed or nearing completion. In case the construction is not moving at the committed pace, you might ask the bank to stop the payments to prevent incurring losses to yourself as well as the lender.

3. Make sure the builder has all the necessary documents & approvals in place:

Whenever a builder has to start his construction activities, he/she must obtain a commencement certificate and other approvals required to start the work from relevant authorities, as lack of these documents might result in stalling of these projects, which may ultimately result in a loss of investment or legal hassles. There have been many such cases which have been gaining prominence in mainstream media for all the wrong reasons. So beware and check all the credentials before commencing the purchase of a house.

4. The builder should be registered with the lending authorities:

The buyer should make sure that the builder or developer is registered with the lending authorities and is creditworthy. This scrutiny will help you ascertain whether the bank has already approved the loan or not. Several legal advisors when specializing in this process could be consulted in case you need to rectify the credibility of a builder.

5. Ask the builder to customise your home:

In some case, you get the additional advantage of customising your house since the building/house is under construction. This might come at an additional cost, but by doing so, you can make some necessary and convenient changes to the housing plan.

6. Flexible Payment Structures:

It is worth noting that in the specific scenarios of obtaining a loan for any under construction property, you need to pay the monthly instalments only on the amount that is being disbursed at that point in time and not the complete loan value. Several borrowers will find this convenient since it may not cause any financial strain on their day-to-day activities.

The decision to dive into an under construction project should be based on well informed and extremely well-researched facts and ground realities so as to not fall into the trap of clever marketing & promotional strategies of the builders. Following this research, you should compare various Home Loans for an under construction property and choose the most affordable plan according to your repayment capacity.

Home Loan Tax Benefits for Under Construction Property

You can enjoy tax benefits on repayment of principal as well as interest amount for Home Loan availed for a self occupied property.

A) Under Section 24(b) tax rebate up to Rs 2 lakh can be availed of annually for repayment of interest on housing loan.

B) Under Section 80C, tax benefits up to Rs 1.50 lakh can be claimed for principal repayment.

The tax benefit on repayment of principal amount is standard for all Home Loans. However, for claiming rebate on interest payment, the construction of a property should be completed in 5 years and it should be used for self occupation.  You cannot enjoy Property Tax interest benefit before the completion of the project.

The interest paid before possession of the property .i.e. during construction is tax deductible in five equal instalments. These rebates will begin from the year when construction is completed. The maximum rebate limit is Rs 2 lakh for self-occupied homes.

An individual is allowed to have maximum of two properties as self occupied. The total of interest rebate on Home Loan under Section 24(b) is restricted to 2 lakh.

In case the property is sold within 5 years of possession, the property tax benefit claimed for interest payment will be considered as income in the year when property is sold.

Also Read: 5 Things to Consider Before Constructing Your House in India

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