In India, most homes are bought through home loans taken from banks or other institutional lenders. The latter could be generic non-banking financial companies (NBFCs) or even specialised home finance companies (HFCs).
Nevertheless, a home loan works on the basic principle of any other loan. The lender sanctions the loan to the borrower towards the purchase of the product (in this case the home) for a tenure (which is typically long for a home loan, usually 20 years), and the borrower has to repay the loan in the form of instalments, known as equated monthly instalments (EMIs), comprising both the principal and the interest component on the loan.
But there are other forms of loans related to home or land, such as home improvement loan, which many homeowners or homebuyers may not be aware of. Here’s how they can use these loans for their home fulfilment dreams.
Home Construction Loan
For those who already own land but need capital to build a home, a home construction loan could be an ideal solution. These loans differ from typical home ones in the way they are disbursed.
Typically, home loans could be disbursed in lump sum or in phases (if it is tied to a construction-linked project). However, home construction loans are always released in phases as they are tied to the progress of the building work.
The amount approved for a home construction loan is generally based on the approximate construction cost.
This structure allows homeowners to manage project funding in real-time, thus reducing the financial strain during construction.
Home Extension and Improvement Loan
If you already own a home, but would like to enhance or extend it by adding a room or a storey, you could consider a home improvement loan.
Use can use these loans for undertaking structural or cosmetic changes in your home. Since the costs of these changes could well run into a few lakhs, home improvement loans provide a cost-effective means of borrowing to enhance the condition of your home. The rate of interest on home improvement loans range from 6.75 per cent to 11.25 per cent per annum and the tenure is typically 5-year-plus.
Home Loan Balance Transfer
This is not exactly a home loan, but rather a method to reduce the monthly outgo on your existing home loan to a more favourable interest rate regime by transferring your existing loan to another lender.
If you have already taken a home loan and are repaying it now, you have the option to switch to a different lender.
While switching lenders can reduce the interest burden on your loan, borrowers should be careful about hidden costs such as processing fees or administrative charges before initiating a transfer.
