If you are a person who likes things customised to your taste, then a Composite Loan is the product for you. Keep in mind, however, that a Composite Loan is different from a regular Home Loan.
A Composite Loan is taken to purchase land and to meet the cost of construction of a house, which makes it perfect for anyone who prefers a garden and terrace of their own instead of an apartment with a balcony.
This was the case with Sahil, a software engineer from Bangalore. Sahil wanted to construct a house of his own rather buy a regular apartment. He found a plot that would cost him Rs. 30 lakhs, while the construction of a house on it would set him back by another Rs. 20 lakhs. Sahil had already saved Rs. 15 lakhs over the years and took a Composite Loan of Rs. 35 lakhs to cover the deficit.
Intrigued? Well, here’s how Composite Loans work:
Composite Loan a.k.a Plot-Plus-Construction Loan
A Composite Loan, also known as Plot-Plus-Construction Loan, is a type of Home Loan offered to individuals who are looking to purchase a plot with the purpose of building a house on it within the next few years. This kind of loan is disbursed in various instalments, commonly known as tranches.
The first tranche is disbursed for the purchase of the plot, while the rest of the tranches (usually three) are released as the construction of the house progresses. Once you decide on the plot you want to buy, you can approach a bank or lender for a Composite Loan.
Additional Reading: A 9-Point Checklist To Buying Land/Plot In India
Understanding the tranche system
When applying for a Composite Loan, you need to let the bank know how you intend to divide the funds between the costs of purchasing a plot and constructing a house. This information will determine the quantum of loan disbursed to you at various stages of the construction. The amount required to purchase the plot will be credited to your account first while the funds needed for construction will follow in tranches.
In Sahil’s case, he intended to use Rs. 20 lakhs to purchase the plot and Rs. 15 lakhs for the construction of his house. The banks initially disbursed Rs. 20 lakhs for the purchase of the plot, plus Rs. 5 lakhs for construction. The remaining two tranches of Rs. 5 lakhs each were disbursed to Sahil at varying stages of construction. Keep in mind though, that the tranche system may vary from one bank to another.
Additional Reading: 6 Options You May Not Think of While Taking a Home Loan
Banks usually closely monitor the construction progress to ensure that the money isn’t being used for any other purpose. In the case of Sahil, the first tranche was released to purchase the plot and to start the construction process. The second tranche was released upon the completion of 30% of construction and the final tranche was released when construction was 80% complete.
The borrower is required to submit a certificate of construction completion (attested by the architect/CA) in order to apply for the release of the next loan tranche. Banks reserve the right to cross-verify the same through their valuation agency, who may visit the site to verify the same.
Additional Reading: Home loan EMI essentials and types!
Repayment, interest rate, and loan tenure
In the case of a Composite Loan, the loan is deemed to be fully disbursed upon the receipt of the last tranche. The borrower is required to pay only pre-EMIs until the complete amount is disbursed. Your bank will have to disburse the complete amount within 2-3 years of sanctioning the loan. However, banks reserve the right with regards to disbursement of a loan in various tranches.
The interest rates on Composite Loans may also vary from bank to bank. Also, if the construction isn’t completed within the estimated time, you may have to pay extra interest or the bank may even recall the loan.
The tenure for a Composite Loan usually ranges anywhere from 1 to 20 years. The term doesn’t extend beyond the retirement age or 60 years, whichever is earlier, but the tenure can extend up to 65 years for a self-employed individual.
Additional Reading: The Dos And Don’ts For Home Loan Prepayment
Income Tax Benefits
You can claim tax sops on a Composite Loan as long as you finish the construction of your house within three years of purchase of the plot.
Loan Amount:
Banks generally fund 50% to 80% of the market value of the plot. The amount varies from bank to bank and it depends on the following factors:
- a) Repayment capacity of the borrower
b) Location of the property (within or outside city limits)
c) Type of allotment (direct allotment by developer or resale)
d) Is the land project approved by that particular bank or financial institution?
e) Age of the borrower
f) Sources of income (rental income, interest on investments)
When banks issue a Composite Loan, they always consider both the market value as well as the cost of the property as per the sale deed/ builder allotment papers etc. The market value of the property is provided to the lender by the architect. Apart from the regular property documents (as required in with a Home Loan), lenders ask for the cost estimate for construction of the property. In Sahil’s case, the banks asked for:
- a) Copy of all certificates issued to the developer by the government urban-planning authority (PUDA/ GMUDA)
b) Original property related documents issued by the developer to him i.e. allotment letter (stating plot number is mandatory to ensure proper demarcation of property), possession certificate, a copy of sanction plan of property (if any) etc.
Additional Reading: Home Loan Handbook: All Questions Answered
Composite Loan policy rules
When you apply for a Composite Loan it is assumed that the loan is taken for a house that will be self-occupied. The construction should cover at least 25% of the plot area and should qualify as a dwelling unit. The structure or a part of the structure of the residence should be occupied by one person or by two or more persons who maintain a common household.
While the bank will guide along the way once you take out a loan, in the general the process entails the following:
- a) The borrower has to provide the cost estimate for construction of the dwelling unit at the time of taking up the loan.
b) The estimate provided, should be certified by an architect or a chartered accountant
c) For a construction loan, the bank can fund anywhere between 70% – 90% of the construction estimate. The maximum loan-to-value ratio should not exceed 80% (this limit varies as per the internal policy of the lender)
Additional Reading: Insurance Protection For Home Loans
If purchasing a plot and constructing your own home is not your cup of tea, you can apply for a regular Home Loan. We have a host of them on offer.
Hai I am simhachala rao from ISRO, We around 4 people together want to aply for a composite loan. which bank can give composite loan for 4 people for buying site+ construction of home
Hi Simhachala,
Most banks in India offer composite loans. But note you might have to communicate exactly what you are looking for to the bank. There might also be some restrictions on having more than 2 co-applicants. This differs from bank to bank so please check with your bank. If you would like to apply for a Home Loan through us, please click here.
Cheers,
Team BankBazaar
Hello Team
I need a composite loan in which total ask is about 33L (in which 14L is for land (14L is as per agreeement with seller but according to the DLC rate it is 9.25 lac+10% for corner plot ) ). please tell me what will be the amount of downpayment and will it to be paid in
a)one go(20 % of 33L) or
b) it will paid for land first (20% of 14L land) and later in next installment (20% of 19L house).
In case DLC rate will be considered by bank please help me with the down payment that will required from my side.
Thank you so much!!!
Hi Vikram,
The exact amount and break-up of the down payment will be decided by your bank. You will have to contact the bank for further details.
Cheers,
Team BankBazaar
hi, i am Geetha ,
I want to purchase a plot and construct house,i need some 40,000,00 composite loan,
my monthly income of me & my husband is 80,000(Salaried)
how much loan amount i will get the plot cost is 20.000,00 and house construction i need 20,000,00, please tell me .and suggest me which bank pay me full amount.
Hi Geetha, Please check your eligibility for a Home Loan here. Cheers, Team BankBazaar
Hi,
Iam sree. I got a loan from one of the leading bank as composite loan (10L)on 2013 with ROI 10.95% and due to some unexpected reasons not able to construct a house with in the 18 months. Now they are telling that loan will be converted as site loan with ROI is 13.25%. from the begining we are paying only interest monthly 9500. If the loan is converted from composite to site loan how much i need to pay to the bank. If i get any reduction in principal amount 10L.
How to calculate that .
Please suggest me.
Hi Sree, We would love to help but due to the specific nature of your question, we suggest that you get in touch with your bank. They’ll help you with the calculation. Cheers, Team BankBazaar
Hi Sree,
What is the procedure to be followed, if we want to go for a group composite loan ? Say two/three people want to buy a land and construct a three/four floor building.
Thanks
Siva
Hi Siva Sagar,
a) The borrower has to provide the cost estimate for construction of the dwelling unit (at the time of taking up the loan).
b) The estimate provided, should be certified by an architect or a chartered accountant
c) For a construction loan, the bank can fund anywhere between 70% – 90% of the construction estimate provided by the borrower, subject to the maximum LTV not exceeding 80% of the land+building value (this limit varies as per internal policy of the lender)
All the best.
Cheers,
Team BankBazaar
Hi,
This is the best write up I have seen on this topic. I have one question related to the term “self-occupied” you have used in your write-up.
Did you mean, we cannot let-out the property we construct on our plot using composite loan ?
another question is regarding the tax exemption under Section 24 on interest. Does th e total loan i.e., plot component + construction component qualify for this?
Hi Ashish Kumar,
The loan for the plot will not qualify for tax deductions. Only the loan used to construct the house can be claimed under Section 80C and Section 24 of the Income Tax Act. To understand if you can let out the property you construct, we suggest that you read the terms and conditions of the loan that you avail.
Cheers,
Team BankBazaar
Dear Sir/Madam
My Name is Guru. I got a loan from from the canfin bank as composite loan (29L)on Sep, 2016 with ROI 10.95% and due to some unexpected reasons not able to construct a house with in the 18 months. Now they are telling that loan will be converted as site loan with ROI is 13.25%..
Please suggest me, if there any option to postpone to 05 months (after 18 months) for house construction,
Regards
Guru
Hi Guru, Loan terms differ from one bank to another. We suggest that you get legal counsel for more clarity on this. You can even consider a balance transfer if you get better rates from other banks.
Hello. Appreciate your write up on composite loan. I have some queries on LIC Composite Loan – Griha Prakash. I availed this for about 25 L and got it 6 months back. I was told i have to start construction in 1 year. However i have got into a financial situation. I am told i can give a letter and delay construction by an year. I have the following queries, please help me to the best of your understanding on this and provide links to read up more wherever possible.
1. I believe after 6 months i can part prepay my loan – doing part payments similarly in 2 years and closing the loan will cause LIC to charge more interest rate ? I heard if we dont construct, we have to pay almost double the interest rate from beginning ?
2. Can i sell the land without construction without getting into higher interest rate charge by LIC ?
Please provide your thoughts on above. Eagerly awaiting your comments on these. Thanks a ton.
Hi Sunil,
Most lenders charge land loan rates for composite loans if the construction is not commenced within the given time. Land loan rates are much higher than Home Loan or composite loan rates. We would love to help you further but since we don’t have information on this loan, we won’t be able to help you. We suggest that you go through the terms and conditions of the loan to get the details. In case you want to sell the land, it is best to contact your legal counsel for help.
Cheers,
Team BankBazaar
I have taken land loan from ICICI to purchase pot 3 years back. Now after Ii would like to transfer this loan to India bulls and construct house and will make it composite loan, Whether I will get tax benefit for the interest part and principal for whole amount. Please help me with suggestion
Dear Benny,
There are no tax benefits on land loan. Only for a composite loan, the portion that is used to construct a house can be used for tax deductions.
Cheers,
Team BankBazaar
Hai Expert
I am Abhilash & have taken a composite loan & purchased a plot & also started the house construction , now it is four months that I have started payment EMI too , please let me know whether I should go ahead & declare the EMI or the interest part for getting the income tax benefit .
Looking forward for your advise
Hi Abhilash,
Since yours is a composite loan, you can claim income tax benefit for only that portion that pertains to the construction of the house. There are no tax benefits for loan taken for purchasing a plot. Hope this helps.
Cheers,
Team BankBazaar
Hi
I am Umashankar salarid person I want to borrow composite loan and want to build house after 2 year can I get tax benefit using from day one or this year or do I need to start construction then I can apply for tax benefit.
Hi Uma,
Since yours is a composite loan, you can claim income tax benefit for only that portion that pertains to construction of the house. There are no tax benefits for loan taken for purchasing a plot.
Cheers,
Team BankBazaar
Hi Uma,
Since yours is a composite loan, you can claim income tax benefit for only that portion that pertains to the construction of the house. There are no tax benefits for loan taken for purchasing a plot.
Cheers,
Team BankBazaar
In terms of Income-Tax benefit for a composite loan, Your statements are vague. Could you cite any reference to detailed discusions that says a composite home loan (a liablility on buying home property) could not be availed tax-benefit under Section-80C? If not please leave it as open statement “To be determined”. For composite loan is treated as single whole liability on borrower for buying a Home-property and land apurtenance.
Hi there,
Thanks for stopping by. It is true that land loans have no tax benefits. Please check the Income Tax Department website – https://www.incometaxindia.gov.in. Since a composite loan is a land loan cum a home loan, you can claim tax benefits under Section 80C and section 24 only when you construct a house on the property. All the best!
Cheers,
Team BankBazaar
Dear Team,
-> I am planning to buy a composite loan with the value of 40 Lakhs (20 lakhs for Plot purchasing and 20 Lakhs for Construction). But as of now package is 6.48 Lakhs per anum. So i have planned to get 20 Lakhs for plot purchasing after 1 year i can apply for another 20 lakhs for construction. Is it allowable ?
-> Or do we have any other option to do this ? Like As of now i can apply for land loan with the value of 20 lakhs and after 1 year i can apply another 20 lakhs for construction. Finally is it possible to convert these both loans to composite loan ?
-> Because as per the discussion with the bank as of now they can approve only 20 to 23 lakhs for this package. If i wait to apply the loan for another 1 year then most of the plots will sale to another parties That’s why i have posted the above 2 questions.
Kindly provide some suggestions for this.
Thank you.
Dear Gopalakrishnan,
Usually, banks have a timeline for construction in case of composite loans. If you don’t start constructing within this timeline, the interest rate will become the same as that for a plot loan. Discuss this with your bank and see if you can take a composite loan.
Cheers,
Team BankBazaar
Hi,
I took a composite loan from HDFC. The land Loan amount was disbursed. After that due to some personal issues, I will not be able to build the house. I want to close my loan. Is it possible? I am ready to pay the land loan in one go as well. Please suggest.
Hi Vijay,
Kindly check with the bank. If they let you close the loan at once, you can go ahead. However, there may be charges associated with closing a loan at once. Your bank will tell you about it.
Cheers,
Team BankBazaar
If someone takes a composite loan for 630000 from bank and did a contract with contractor for making home, and there is a legal dispute between the contractor and the customer of bank, will bank stop the emi’s in this case for next payments. if they come to know about legal disupute going on with this property.
Hi mitwa Bhasin,
The bank will not be worried about this as long as you are paying your EMIs. The bank will be concerned only if you stop paying the loan.
Cheers,
Team BankBazaar
Sir,
I have taken a composite loan from canfin homes pvt ltd, whether i am eligible for PMAY scheme if i start construction?
Hi sridhar,
Please check with Canfin Homes if you will be eligible. Most Home Loans are eligible for the PMAY subsidy. However, there are some eligibility criteria such as income bracket and the maximum tenure of the loan that will be taken into consideration.
Cheers,
Team BankBazaar
Hi
I would like to transfer existing composite loan to another bank. My property located in bangalore. its BBMP B khata property and DC conversion is not yet done. On this property, i have a composite loan, Is there any bank which can offer composite for my site.
Let me know if you need additional details to furnish
Hi Hari,
BankBazaar doesn’t offer composite loans for property. Please check with other banks for this.
Cheers,
Team BankBazaar
Hi,
I have few questions reg composite loan.
1.Will I have to pay pre emi or emi post plot loan amount(only) disbursal?
2.Can I make part payment after six months from loan disbursal?
3.Is there max amount cap in part payment?
4.Can I repay the loan completely before getting loan for house construction from same bank?
Hi Mr. Krishnamoorthy,
You can check with the bank you’re planning to take a composite loan from regarding these queries.
Cheers,
Team BankBazaar