If you’re planning to build a new home or start a real estate project, a construction loan could be the right financial tool to help you get started. Unlike regular home loans that are meant for buying ready properties, a construction loan is designed to finance the building of a new structure. This article serves as a simple, clear, and complete guide to help you understand what a construction loan is, how it works, and what to expect during the process.
What is a Construction Loan?
A construction loans are short-term loans used to finance the construction of a residential or commercial property. It is generally issued for a duration of 12 months to 36 months. Unlike traditional loans, the funds are not disbursed in one lump sum. Instead, the lender provides the money in phases, known as “draws,” based on the progress of construction work.
Key Features of a Construction Loan
- Loan Tenure: Typically 1–3 years
- Interest Rates: Usually higher than regular home loans
- Disbursement: Made in stages based on work completion
- Repayment Type: Interest-only during construction, then EMI
- Collateral: The property being built is usually the collateral
How Does a Construction Loan Work?
When a borrower applies for a construction loan, the lender evaluates the construction plan, cost estimates, land documents, and borrower’s repayment capacity. Upon approval, the loan is disbursed in stages, and interest is charged only on the disbursed amount.
For example, if your total loan is ₹50 lakhs and only ₹10 lakhs have been disbursed in the first phase, interest will be charged only on ₹10 lakhs initially. As construction progresses and more funds are released, the interest payment increases accordingly.
Eligibility Criteria
To qualify for a construction loan, you generally need to meet the following conditions:
- Age: Between 21 and 65 years
- Income: Stable and sufficient income from job or business
- Credit Score: Ideally above 700
- Approved Building Plan
- Ownership of Plot: The plot must be in your name or jointly held
Documents Required
Here’s a basic list of documents typically required to apply for a construction loan:
- Identity Proof: Aadhaar, PAN, Passport
- Address Proof: Utility bill, rent agreement, passport
- Income Proof: Salary slips, ITRs, bank statements
- Construction Plan: Approved building plan and cost estimate
- Land Documents: Ownership papers, title deed, encumbrance certificate
Interest Rates Comparison: Construction Loan Offers from Banks
| Lender | Rate Range (p.a.) | Fixed / Floating | CIBIL Impact | Women / Concessions | Loan Products & Key Highlights |
|---|---|---|---|---|---|
| SBI | 7.50% – 8.70% | Floating (EBLR/MCLR) | CIBIL ≥ 750 gets best slab | None specific | Standard Home & Home Construction Loan; amount up to ₹30 L+; flexible repayment tied to salary or income |
| HDFC Bank | 7.90% onwards for home/construction loans | Floating | Profile & credit-score based | None specific | Home Loan & Construction up to ₹10+ Cr; EMIs start after 6–12 mo post construction |
| ICICI Bank | 8.00% onwards | Floating/Fixed options | Bureau-linked pricing; 8.75% for CIBIL 800+ | None specified | Standard & Instant Home Loans, construction options, up to ₹5 Cr; fixed rates for 24–60 mo |
| Axis Bank | 8.35% – 11.90% | Floating & fixed | Salary & credit profile based | 0.05% pass-on for women / salaried customers | Home & Construction Loans including Asha and Balance Transfer options |
| PNB Housing Finance | 7.55% – 9.35% | Floating | Profile-based tiers | None specified | Construction finance with flexible tenures and loan caps |
| Canara Bank | 7.40% – 10.25% | Floating | Standard public‑sector pricing | None specified | Home & Construction with plot financing schemes |
| Bajaj Housing Finance | 7.49% onwards | Floating | LTV and credit-score dependent | None specified | Specialized construction & home finance up to ₹75 L+ |
🔍 Highlights
- Lowest Floating Rates:
- SBI offers the lowest rate at 7.50%, consistent across loan sizes.
- PNB Housing Finance and Canara also start attractive rates at 7.55–7.40%.
- Fixed vs Floating Options:
- Axis Bank and ICICI provide both floating and fixed-for-term solutions (24–60 months).
- CIBIL-Based Pricing:
- ICICI offers 8.75% for borrowers with CIBIL ≥ 800, rising gradually for lower scores.
- HDFC and Axis Bank tailor rates based on borrower profile, though slabs aren’t publicly detailed .
- Women Concessions:
- Axis Bank offers a 0.05% discount for salaried women borrowers; no other lender lists explicit construction loan concessions.
- Product Characteristics:
- Loan tenures typically range 3–10 years, with drawdowns during construction and EMI holidays until project completion.
- Borrowers can access up to ₹5–10 crore (banks) or ₹75 lakh (NBFCs) depending on property value & LTV.
🧭 Recommendations
- Minimum rate focus: Go for SBI or Canara Bank if you have a solid profile.
- Fixed-tenure predictability: Select ICICI or Axis fixed-rate products.
- Large construction budgets: HDFC and Axis provide high-ticket loans up to ₹10 crore.
- Women borrower benefit: Axis Bank offers a small rate concession for women applicants.
Note: Rates may differ based on your profile and loan terms.
Construction Loan Calculator
Benefits of a Construction Loan
- Pay-As-You-Build: You only pay interest on the amount disbursed.
- Custom Construction: Ideal for people building homes on self-owned land.
- Flexible Terms: Can be converted to a regular home loan after completion.
- Tax Benefits: Eligible for tax deduction under Section 24 of the Income Tax Act after completion.
Drawbacks to Consider
- Higher Interest: Construction loans usually have higher interest rates than home loans.
- Complex Process: More documentation and monitoring are required.
- Strict Timelines: Delays in construction can affect loan terms and approval.
- Conversion Charges: Some lenders may charge a fee to convert to a regular home loan.
Steps to Apply for a Construction Loan
- Estimate the Total Construction Cost
- Get Building Plan Approved
- Gather All Documents
- Apply with Multiple Lenders for Best Rates
- Get Loan Sanctioned and Sign Agreement
- Receive Disbursements in Phases as Work Progresses
FAQs
A. A construction loan funds the building of a house on your own land and is disbursed in stages as construction progresses. It’s not meant for purchasing ready-built homes.
A. Loans are released in tranches tied to construction milestones—like foundation, roofing—typically after inspection or submission of photographs.
A. Rates for under-construction loans are generally higher than standard home loans, typically 8%–15% p.a., depending on your credit profile and lender.
A. Most construction loans use floating interest, paid monthly during construction (pre-EMI). Once construction ends, EMIs include principal.
A. You start with pre-EMI interest-only payments during construction. Full EMI begins only after disbursal is complete or post-construction.
A. Common requirements include: KYC, income proof, land title deed with a no-objection certificate, approved building plan, and construction cost estimates.
A. Banks typically finance 80–90% of the construction cost. Higher down payments may improve LTV and interest rates.
A. Yes. Under Sections 24(b) and 80C, you can claim interest (up to ₹2 L) and principal (up to ₹1.5 L) deductions after construction completion and possession.
A. Construction loans are shorter-term than home loans—usually spanning 12–24 months for construction, with EMI tenure possibly extending to 30 years when converted.
A. Absolutely. Post-construction, you can either convert it into a regular home loan or transfer the loan to another lender at better terms.
Final Thoughts
Construction loans can help turn your dream project into reality, whether you’re building a home for your family or a commercial structure for investment. However, it’s essential to understand the process, compare offers, and prepare for extra scrutiny. Always review the lender’s disbursement terms, interest rate, fees, and conditions before signing.
This guide simplifies everything you need to know about construction loans, offering a clean and clear roadmap to finance your building journey with confidence.