Home loans on a flat being built

A home loan on a finished flat is simple: the bank pays the seller, you get the keys, and your EMIs start. On a flat that is still being built, none of that happens on day one. The bank pays the builder in instalments as the building goes up, you pay interest on whatever it has paid so far, and your full EMI starts only when you take possession, which may be three or four years away.

That gap between the first payment and the keys is where most of the confusion sits, and a surprising amount of the cost. This guide walks through it on one worked example: a ₹1 Cr flat, a loan for 75% of the price at an illustrative 8.5% over 20 years, and a construction-linked payment plan that runs 36 months from booking to possession.

How the bank pays the builder

RBI does not let a bank hand the builder your whole loan up front on a project that is still being built. Disbursal has to be “closely linked to the stages of construction”. So the money moves in steps: the builder reaches a stage and sends you a demand letter, you pass it to the bank with any certificate it asks for, and the bank releases its share directly to the builder once it is satisfied the work is done.

Your own contribution usually goes in first: lenders such as ICICI and HDFC ask for proof that you have paid your share before they release anything. With a 75% loan you pay the first ₹25 lakh of the price yourself, and the bank starts paying once that is spent. In the worked example your money covers booking and the foundation; the bank’s first release comes at month 7, when the ground-floor slab is cast.

Two things follow. The payment plan in your agreement for sale is also your loan’s disbursement plan, so read it with the bank in mind: a plan that asks for a large share early, before much is built, puts more of the price on you before the bank will pay anything. And a stage the builder has not reached is a stage the bank should not pay for. If a demand arrives ahead of the progress the builder has filed with RERA, ask about it before anyone pays it. Our guide to reading a Karnataka RERA filing shows where that progress is recorded.

The bank’s schedule need not match the builder’s, either. HDFC, for one, says it releases money in instalments that “usually do not exceed three”, on progress “as assessed by us and not necessarily according to the developer’s agreement”. If a demand falls due before your lender is ready to pay it, the gap is yours to fund, so ask how your lender disburses before you settle on a payment plan.

Pre-EMI: interest while you wait

From the first release until possession, you pay interest on whatever the bank has released so far. Banks call it pre-EMI. It is interest only, so none of it reduces what you owe, and it grows each time the bank pays another stage.

In the worked example that is ₹8.29 lakh over 29 months, rising to ₹49,583 a month just before possession. If you are renting while the flat is built, it comes on top of your rent.

It also runs for as long as construction does. If possession slips, pre-EMI keeps coming, which is why the date the builder has filed with RERA, and how much has actually been built, matter as much to your loan as to your move. Our guide to what a possession date means covers how to read both. If the builder misses the date in your agreement, RERA lets you claim interest for every month of delay, at State Bank of India’s highest lending rate plus 2% under the Karnataka rules, or withdraw and get your money back with interest. That compensation is the builder’s to pay; your bank’s interest does not stop in the meantime.

Pre-EMI or full EMI from day one

Some lenders let you start full EMIs from the first release instead: an EMI on the amount released so far, recalculated as each stage is paid, so part of every payment repays principal from the start. HDFC calls this tranche-based EMI; SBI’s and ICICI’s pages describe pre-EMI only, so ask your lender. The two routes cost very different amounts over the life of the loan.

On the worked example, full EMIs from the first release save ₹13.62 lakh of interest and clear the loan two years and five months sooner. Most of that comes from starting the loan’s 20 years at the first release rather than at possession, and from repaying principal during the months the pre-EMI route spends paying interest only.

The catch is cash. During construction you pay more each month than you would on pre-EMI, possibly while also paying rent, and after possession the EMI is ₹66,626 against ₹65,087, because the remaining term is shorter. If that is too tight, there is a middle route: take pre-EMI and prepay whenever you can. On a floating-rate home loan, RBI does not allow a bank to charge you for prepaying, in part or in full, whatever the source of the money. Our prepayment guide works out what it saves.

The cash you need on day one

A home loan never covers the whole bill. RBI caps what a bank can lend against a home’s value, by the size of the loan: 90% on a loan of up to ₹30 lakh, 80% on one of up to ₹75 lakh, and 75% on anything larger. It also bars banks from counting stamp duty, registration and documentation charges in that value unless the home costs ₹10 lakh or less, so those come out of your pocket too.

On the worked example that is ₹52.14 lakh before you have the keys: your ₹25 lakh share of the price, the charges set by law, the builder’s own charges, the bank’s fees and the pre-EMI. Our full-cost guide breaks the charges down line by line. Plan your savings around this number, not around the down payment alone.

The PMAY interest subsidy

If your household earns ₹9 lakh a year or less, nobody in it owns a pucca house anywhere in India and none of you has had a government housing benefit in the past 20 years, the central government’s PMAY-Urban 2.0 scheme may pay part of your interest. It covers 4% interest on the first ₹8 lakh of the loan, for up to 12 years, to a maximum of ₹1.80 lakh, paid into your loan account in five yearly instalments. The limits are tight for Bengaluru: a loan of up to ₹25 lakh over more than five years, a home worth up to ₹35 lakh and a carpet area of up to 120 square metres, with the loan sanctioned on or after 1 September 2024. You apply on the scheme’s unified web portal, which passes the claim to your lender, and an under-construction home has to be geo-tagged before each instalment is paid.

The paperwork banks ask for

For an under-construction flat, a lender wants to see the project as well as you. Expect to be asked for:

• The allotment letter or the stamped agreement for sale, and receipts for everything you have paid the builder so far.
• The project’s papers: the approved building plan and permission for construction, the builder’s registered development agreement where the land is a joint development, the title deed, and a no-objection certificate from the builder.
• For each release, the builder’s demand letter and, at some banks, an architect’s certificate of the stage reached, with proof that your own contribution has been paid.

Banks also keep lists of approved or pre-approved projects, where they have already checked the land title and approvals once. A loan on one of those is usually quicker to sanction. If your bank has not approved a project, ask why: the answer can be as useful as the loan.

Check your credit report first

Your credit record decides whether you get the loan, and the part of your rate that reflects your credit risk. Every credit bureau has to give you one free full credit report, with your score, once a calendar year, so check each before you apply and get any errors corrected. Since July 2026 lenders report your repayments to the bureaus four times a month, so a missed EMI shows up within days. Set up an auto-debit for both the pre-EMI and the EMI.

Read the Key Facts Statement

Before you sign, the bank has to give you a Key Facts Statement: a summary of the loan in a standard format and in a language you understand, with its own proposal number. It shows the annual percentage rate, which folds in the fees and charges, including third-party costs the bank collects such as insurance and legal fees. The bank has to explain it and take your acknowledgement, and it has to stay valid for at least three working days, which gives you time to set it beside another lender’s. It comes with a sheet showing how the annual percentage rate is worked out and a repayment schedule, and if you accept it within those three days, the lender is bound by it.

The rule that matters most: a fee or charge that is not in the Key Facts Statement cannot be charged to you at any point in the loan without your explicit consent. So collect every lender’s statement, compare the annual percentage rate rather than the headline interest rate, and keep the one you sign. The same summary has to appear as a box in the loan agreement itself.

When the interest rate moves

At a bank, a floating-rate home loan has to be linked to an external benchmark, such as RBI’s repo rate, which has been 5.25% since December 2025. Your rate is the benchmark plus a spread, and it has to reset at least once every three months. The part of the spread that reflects your credit risk can change only if your credit assessment changes substantially, as your contract sets out; the rest can change at most once in three years. Housing finance companies are not bound by the external-benchmark rule, so ask one how its rate is set. RBI has proposed extending the reset rules to every lender from April 2027, but for now that is a draft.

When the rate goes up, the lender has to tell you, and you get a choice: a higher EMI, a longer tenure, or a mix of the two. You can prepay part or all of the loan at any point. Switching to a fixed rate is possible only if the lender offers it, and any charge for switching has to be in your sanction letter. You are also owed a statement every quarter.

Watch the tenure option, because it is the quiet one. On the worked example, if the rate rose to 9% and you kept the EMI at ₹65,087, the loan would run two years and four months longer. During construction a rise simply raises your pre-EMI.

If you miss an EMI, the bank can levy a penal charge, but not penal interest added to your rate, and it cannot charge interest on that penal charge. It can still charge interest on the unpaid EMI, at your normal rate.

Moving to another lender

Because a floating-rate home loan carries no prepayment charge, you can move it to a cheaper lender (our guide to how home-loan rates work works through the costs). When you or the new lender ask, your existing bank has to give its consent or objection within 21 days. Once the loan is closed, it has to return your original property documents within 30 days, or pay you ₹5,000 for every day of delay it causes.

Insurance is your choice

Lenders often offer insurance with a home loan: cover on the property, and life cover that repays the loan if you die. A bank must not make you buy from a particular insurer or tie insurance to the loan, and its marketing has to say that buying insurance is voluntary. Any premium the lender collects has to be counted in the Key Facts Statement’s annual percentage rate.

From 1 January 2027 the rule tightens: no compulsory bundling at all. If a lender needs insurance as security, you can buy it from any provider, and it cannot pay for a policy out of your loan without your explicit consent. In practice banks do insist on property insurance: SBI lists it as mandatory, and HDFC wants the property insured with the bank as beneficiary. Life cover on the loan is worth having, but you are free to buy a term policy of your own instead.

Tax while it is built

Under the old tax regime, a home loan on a house you live in earns two deductions under the Income-tax Act, 2025, which replaced the 1961 Act in April 2026:

• Interest, up to ₹2 lakh a year (section 22, which replaced section 24(b)), provided the purchase or construction is completed within five years from the end of the tax year you borrowed in. Miss that and the limit drops to ₹30,000.
• Principal, within ₹1.5 lakh a year (section 123 and Schedule XV, which replaced section 80C), a limit that also covers stamp duty and registration in the year you pay them. Sell within five years of the end of the tax year you took possession and the deduction is reversed.

Nothing is claimable while the flat is still being built. Interest you pay before completion, including every rupee of pre-EMI, is claimed in five equal instalments starting the year construction finishes, within the same ₹2 lakh limit. And under the new tax regime, which is now the default, neither deduction is available for a home you live in. Our guide to home loan tax benefits works through both regimes on one loan. If the tax saving is part of your plan, check which regime you are in, and ask a tax adviser.

Builder-paid EMI schemes

Some projects are sold with the builder paying your EMIs during construction, often called 80:20 or 75:25 schemes, sometimes with a tripartite agreement between you, the bank and the builder. RBI has told banks these products expose borrowers to extra risk: if the builder stops paying or the project stalls, the loan is still yours. And because repayments are reported to credit bureaus, a builder’s late payment on your behalf can pull down your own credit score.

RBI’s rule is that a bank must not release a housing loan up front on an under-construction project; disbursal has to follow construction. The only exception is a project sponsored by a government or statutory authority with no history of failing to finish. If a scheme asks the bank to pay the builder a large sum before the building exists, treat that as a red flag.

Before you sign the loan

• Compare Key Facts Statements from at least two lenders, on the annual percentage rate.
• Match the payment plan in your agreement for sale to the bank’s disbursal, so you know which stages are yours and which are the bank’s.
• Ask about full EMI from the first release, and work out what it saves on your own numbers.
• Budget the cash the loan won’t cover: your share of the price, stamp duty and registration, the builder’s charges and the pre-EMI.
• Check each demand against the builder’s filed progress before the bank pays it.
• Pull your free credit reports from each bureau and fix any errors before you apply.
• Ask how the bank disburses: how many releases, on whose assessment, and what each one needs.
• Separate property insurance from life cover, and buy the life cover wherever it suits you.
• Say no to builder-paid EMI schemes and to any up-front release on an unfinished building.