All You Need to Know About Composite Home Loan

If there is one great dream that all Indians cherish, it is owning a residential property. In cities and urban centres, we hope to own a luxury apartment in a gated community, but in the suburbs, many of us dream of buying a plot of land and constructing the house we have always wanted. This is why most banks and NBFCs have different loan products for different home buyers.

What is a composite home loan?

If you are a real estate investor, you may want to buy a plot of land and approach a bank or lender for a plot or land loan. Alternatively, you may want to invest in a flat or apartment and to fund this, you can apply for a home loan or housing finance.In some cases, real estate investors may want to buy a plot of land and immediately start constructing a building, villa, or duplex on the property. If this is what you are considering, you may opt for a loan product referred to as a composite home loan.A composite home loan is a loan product offered by banks, NBFCs, and housing finance companies. It allows the borrower to buy a plot of land and construct a house according to their own requirements. The construction process should be completed within the loan tenure.

How is a composite loan different from a regular home loan?

Banks and financial institutions lend land or plot loans for the explicit purpose of buying the land. Home construction loans are credit provided only to construct the structure. Regular home loans offer credit for buying under-construction or ready-to-move-in apartments or flats.Home loans that are extended by banks and NBFCs to buy an apartment or flat are some of the most common products extended by lenders in India. They also come with a long tenure and have the lowest interest rates. This is the reason many home loan borrowers take out a top-up on their existing home loan rather than take a personal loan when the need comes up. Composite loans, however, have a higher interest rate than plot, land, or home loans. The eligibility criteria, too, may be more stringent.

Points to remember while applying for a composite home loan

• A composite loan is specifically designed to enable the real estate investor to buy a plot of land and build a house, villa, duplex, or residential structure. The construction of this structure should start within a particular period. For example, a bank may agree to lend you a composite loan stipulating that you must start construction work within two years. If you fail to do so, you may be asked to repay the debt and close the loan or may be asked to pay a much higher interest.
• Regarding home loans, banks often ask the lender to provide the title documents and permits for the apartment and project you plan to buy into. Similarly, in the case of a composite loan, the bank may ask for documents such as the land title and deeds and also your construction plans with your loan application. Opting for a composite loan is a good idea only if you plan to start construction work within a couple of years of approval.
• Home loans can be disbursed in a single instalment or in multiple instalments. You can choose to withdraw the approved amount as needed, particularly if you are keen on buying an under-construction property. In the case of composite loans, the approved amount is almost always disbursed in a staggered way. You can withdraw amounts when you decide to buy the land, start construction, and during the construction period.
• Like most home loans, composite loans also are eligible for tax deductions. To avail of the income tax benefits, you must complete the construction of your house and get a completion certificate.
• Like most home loans, banks or lenders will provide you with about 80% of the total value of a loan, but you must pay the remaining 20%. Regarding plot or land loans, most banks offer about 70% of the land value as a loan, and the remaining must be shouldered by you.

Is a composite home loan right for you?

Like most financial products, there is no one solution that can be right for everyone. If you live in a major city like Mumbai, where land is scarce, it is a good idea to opt for a home loan. In the suburbs or in smaller cities or towns where land is affordable, it is a good idea to opt for a plot loan or land loan if you are not ready to undertake construction immediately. If you plan to acquire the land and construct the house in the immediate future, a composite home loan is a good idea.