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Hi,

I am looking for some specific details on Bank loans for housing:
1. When taking loan for a house under construction, I heard sometime back that banks don't charge interest till the house is ready for occupation. Is it true?
2. If we don't need to pay interest before occupation, is it only for Apartments or even for houses we construct on our own?
3. If banks do charge interest during construction, is it less than your overall loan interest rate? If yes, can you share what is the difference?
4. I regularly hear that banks use most of the initial EMI's only for interest, and only towards the end of the loan period our payments go towards reducing the principal? Is it true? If so, it would be great if someone can explain it a bit.
5. If I take 40 Lakh loan at 10% interest, and let's say my EMI is 40K. The interest for 1st month is Rs. 33,333. So, my payment towards principal would be 6,666. The interest for 2nd month would then be Rs. 33,278. So, my payment towards principal in 2nd month would be 6,722. Like this, the principal would reduce to such an extent that at the end of the loan tenure, the loan gets closed. Is my understanding correct/

Thanks in advance.

1. When taking loan for a house under construction, I heard sometime back that banks don't charge interest till the house is ready for occupation. Is it true?

I don't think it is true. They do charge interest, but your EMIs don't start until completion of construction or until the 'moratorium' period is over, whichever is earlier. I believe you have to keep paying them the monthly interest until then; this is what I did, but the policy may be different for each bank.

3. If banks do charge interest during construction, is it less than your overall loan interest rate? If yes, can you share what is the difference?

This will be your contracted interest rate, the same which you would have paid if you bought a fully constructed house.

4. I regularly hear that banks use most of the initial EMI's only for interest, and only towards the end of the loan period our payments go towards reducing the principal? Is it true? If so, it would be great if someone can explain it a bit.

The interest is charged on the outstanding balance of principal plus any interest accrued. The interest amount will be higher in the initial stages due to the higher balance to be paid back. Provided the interest rate remains the same or lower, the interest amount decreases over the life of the loan. If the interest rate goes up, then banks generally increase the tenure of the loan (number of total EMIs) to keep the EMI amount the same; in this case also, the interest amount to be paid reduces as the time goes by. However, if the number of EMIs must be kept unchanged for any reason (age of borrower, bank policy, etc.) when the interest rate goes up, then the EMI amount must be increased to avoid thethe EMI being less than the interest amount for that period or else the outstanding balance would continue to grow!

5. If I take 40 Lakh loan at 10% interest, and let's say my EMI is 40K. The interest for 1st month is Rs. 33,333. So, my payment towards principal would be 6,666. The interest for 2nd month would then be Rs. 33,278. So, my payment towards principal in 2nd month would be 6,722. Like this, the principal would reduce to such an extent that at the end of the loan tenure, the loan gets closed. Is my understanding correct/

Your understanding is correct!

Thanks a lot bboy for your reply. It was very helpful.

bboy wrote:

1. When taking loan for a house under construction, I heard sometime back that banks don't charge interest till the house is ready for occupation. Is it true?

I don't think it is true. They do charge interest, but your EMIs don't start until completion of construction or until the 'moratorium' period is over, whichever is earlier. I believe you have to keep paying them the monthly interest until then; this is what I did, but the policy may be different for each bank.

In this case, if I don't pay EMIs, the interest will pile up, and I will have to pay interest on the interest itself I guess? As per the example calculation in my first post, the interest works out to about 33K per month initially for 40L loan. Assuming the construction/moratorium time is 6months, I will be owing the bank approximately another 2L (33K * 6) just in terms of interest. Then, my loan would become 42L, and EMI becomes ~42K. Is this correct?

Thanks again

In this case, if I don't pay EMIs, the interest will pile up, and I will have to pay interest on the interest itself I guess? As per the example calculation in my first post, the interest works out to about 33K per month initially for 40L loan. Assuming the construction/moratorium time is 6months, I will be owing the bank approximately another 2L (33K * 6) just in terms of interest. Then, my loan would become 42L, and EMI becomes ~42K. Is this correct?

Well, you are almost right with just one caveat. When you take a loan for construction, the bank will be releasing the payment only in installments according to an agreed schedule or according to the progress of work. So, you will be paying interest not the sanctioned limit, but on the actual outstanding amount. Additionally, even though the EMIs don't start until a later date, some banks allow (actually demand) that you pay the interest amount each month until the EMIs start. At any rate, you will not be paying the banks anything more than the interest on the amount you have availed from them; in case of late start of EMI, you just are paying the interest on the money you have availed from the bank. If you are worried about this, and if you think you may have some extra cash available during construction, then it may be a good idea to look at 'over draft' type of home loans (SBI MaxGain, for example) in which you may move in/out your surplus funds anytime thereby reducing the interest burden. The actual interest rate will be slightly more than the ordinary type of loan though.

Nice thread!

I too have a few questions. I am planning to construct on a plot that is not mortgaged (no loan on it, everything is already paid for). I am planning to construct a house on it that i estimate to cost around 25 lakhs.

1) Will i get 100 % loan (i.e the entire 25 lakhs)?
2) If the answer to the above Q is NO, then can i give the bank a higher estimate of say 31 laks and then request them to grant around 80 % of it which roughly would come to 25 lakhs?
3) How will the bank know whether i am using the money provided by them for house construction or whether i am using a part of the money for some other purpose?
4) Do i have to deposit the documents of my plot with the bank as a collateral?

Good Question,
Bank will check ur detailed quotation from the builder and based on that and progress or ur house construction they will directly credit the money to his business account and not ur account, hope this will be reply to both ur second and third query, for last query i am not sure for this.

If the first property is purchased from own fund (not gift deed) then you will get upto 85% in SBI.
You need to deposit your title deeds with the bank.
I have taken loan from SBI and the procedure of disbursement is first 20% is given so that you can start the construction. for the second disbursement you need to provide them the bills for the disbursed amount + 15% of disbursement(your contribution) so that the second disbursement can happen. They depositted the money to my account and i paid to contractor. There will be a valuator who will visit the site and find out the progress as claimed.

Hi SMVDVS,

Thanks for the response. But there is no "builder" involved here. I am going with a contractor for the construction. For wardrobes / wood work, i will engage a carpenter separately. So if the Bank insists on paying directly to the contractor, then it will be a big problem.

Thanks.

Hi dream_home,

How did you manage to get bills for the labour expenses? What about contractor charges..did he give a bill? Isn't getting bills for construction expenses highly impractical?

Thanks.

My contractor gives me the expenses list on his letter head with his signature. This i produce to bank.