Mortgage and home construction loan – not necessarily the same product

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The purchase of a flat or single-family house and the construction of a residential property are investments that involve high costs. They can be covered with a loan, and most often it is a mortgage. A dedicated loan product for home builders is a home construction loan. Are both loans different?


Home construction loan – how is it different from a mortgage?

Home construction loan - how is it different from a mortgage?

A mortgage is easier to obtain, does not require so many formalities and is usually paid once by the bank . A construction loan also usually has a mortgage security, but requires the submission of several construction documents along with the loan application , and the payment is made in tranches. 


Universal use of a mortgage

Universal use of a mortgage

A characteristic feature of a mortgage is that it is incurred for housing purposes and the collateral for repayment is the entry of a mortgage for the bank in the land and mortgage register of the real estate. Mortgage loan incl. We will finance:


  • purchase of an apartment on the secondary or primary market,
  • purchase of a single-family house,
  • purchase of cooperative rights to premises,
  • purchase of a construction plot, etc.

It is clear that the mortgage can be used in a number of different ways, but the purpose of the loan should be indicated in the loan application and in the loan agreement.


Loan for building a house – one goal

Loan for building a house - one goal


On the other hand, when taking a loan to build a house, the bank obliges the borrower to use the loan in this way.


Formal procedures


What distinguishes a mortgage from a home construction loan is the formal procedure. Banks with construction loans require submitting more attachments. In addition to certificates confirming the client’s financial standing and allowing the assessment of his creditworthiness, construction documents are required for a home construction loan, including:

  • building and land development conditions,
  • building permit with a stamp,
  • construction project,
  • construction diary with the entry of the construction manager,
  • estimate,
  • valuation of an appraiser or bank employee.

All procedures related to taking and using a loan to build a house are more complicated than in the case of a mortgage. With a mortgage, the bank pays money from the loan to the seller of the house or flat, and the property purchase transaction can be closed in a relatively short time. On the other hand, servicing a loan for building a house lasts for years. All because the mortgage is usually issued once, and the loan for building a house is paid in tranches, along with the progress of works, which are monitored by an inspection sent from the bank.