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    Composite Loan

    For some of us, investing in real estate is often realized not necessarily by means of buying a ready to move in house. Due to multiple reasons such as restriction in budget, we prefer buying a plot of land usually in an upcoming locality with a purpose of constructing a house at a later time. Such situations can be challenging from a loan point of view. Since most of us rely upon a home loan to fulfill the purchase, it can be tricky if there is a substantial time gap between owning a plot and construction of a structure. In such situations, getting a housing loan can be a “Big Deal”.

    Well, there is a loan to your rescue known as the Composite Loan which offers to fund both aspects of your housing dream. Though not as popular and easily accessible in India, this type of loan offers financing upfront for buying a plot of land followed by a loan in a phased manner for construction of the house.

    How Does Composite Loan Work?

    It works akin to a standard home loan where financing is provided for plot plus construction. Here, the loan amount is not disbursed at one go but instead handed out in batches as and when the need arises. The first installment is disbursed to avail the plot as per the quantum of financing agreed upon followed by rest of the installments which are disbursed during various phases of construction.

    The best time to avail this loan is just after you choose a piece of land after which you can immediately approach the bank for a Composite Loan. For practical reasons, you can discuss the specifics such as the requirement for the loan with the bank at the earliest. The bank should also be aware of the real time costs involved in construction of the house. Generally, the construction should begin within a year of availing the loan since the clause mandates that the building should be completed within 2 years from the start date.

    Some banks may also offer financing for construction and land purchase as two separate products which may lead to unwanted hassles of paying two different loans. Instead, ask them for availability of a composite loan where you pay just one EMI under a single window. To ensure smooth and timely disbursals, the bank will monitor the construction by means of obtaining certificates attested by an architect/engineer.

    Loan Quantum:

    The loan quantum is dependent on multiple factors such as the eligibility and creditworthiness of the applicant and also the limitations in terms of product itself. The location of the property and reputation of the project will also have a say. Generally, the funding varies anywhere between 70-85% of the project costs.

    Tax Benefits:

    For availing tax benefits under prevailing sections of the Income Tax Act, the construction of the house should be completed within 3 years from the time of availing the loan for plot purchase and construction. The loan taken for building a structure should be for self-occupation.

    General Note:

    • The loan repayment tenure varies anywhere between 1 to 20 years depending on the lender in question. The retirement age of the borrower is also considered with a cap of around 60-65 years before which the loan should be realized.
    • The plot + construction loan is only available for purchase of land within the municipal limits. The plot should not be an agricultural land.
    • The interest rates are linked to the MCLR (Marginal Cost Based Lending Rate) and is mapped to the interest rate slabs for housing loan.
    • The rate of interest varies on the basis of the loan amount and/or tenure availed.
    • Processing fee varies between 1-2% of the disbursed loan amount where the fee is deducted from the loan proceeds.
    • The repayment mode offered is either via ECS (Electronic Clearing Service) or via PDC (Post-dated Cheques).
    • Prepayments are allowed during the repayment tenure for up to a certain extent during a specific period.
    • Documentation is in the form of providing KYC (Know Your Customer) documents, income proof documents, bank statements and paperwork relating to the plot and construction plan.

    Now that you’ve understood the benefits of a plot + construction loan or Composite Loan, make sure to explore this option to ensure the financing is done under one roof. Before choosing a specific lender, understand the terms and rates and choose the most feasible offer. You can look up for resources on this website for home loan products offered by banks and HFCs in India under the Home Loan section.

    Also use tools such as the Home Loan EMI Calculator to get a first hand view of the financials involved in the loan. 

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