Composite Loan is a mix of Land Loan and Construction Loan. It is not very popular jargon in Indian Mortgage Industry. One of the reason is scarcity of land in big cities i.e. buyer prefer flats in big cities. The concept of independent house or villas is more relevant in small cities due to availability of land. As i promised in my last post that next post will be dedicated to composite loan. Yesterday i visited one of the leading PSU Home Loan provider to get some clarity on Composite Loan. Whole branch took 45 mins to understand what is Composite Loan. Loan Manager of the branch called Regional Manager (Home Loan) to understand this alien term Composite Loan. In this regard, staff of leading Housing Finance Company was well aware. The branch executive of HFC explained me well and answered most of the queries related to Composite Loan. In my previous post on 7 Facts you should know about Land Loan, i explained difference between Land Loan and Composite Loan. As the title of the post suggests composite loan is plot loan + construction loan. Similar to Plot Loan, lets check out important facts about Composite Loan
9 Imp points you should know about Composite Loan
(a) You can Dissect Composite Loan: Depending on your requirement, you can avail Plot Loan and Construction Loan separately. If you are informed customer then sales team of Home Loan Provider insist on Composite Loan. They may mislead you that you might face problem in future availing construction loan separately. Composite Loan is beneficial only if you are planning to start construction immediately or in near future. I suggest my clients to avail Plot Loan and Construction Loan separately if the time gap between plot purchase and commencement of construction is more than 1 year.
(b) Income Tax Benefit on Pre-EMI Interest: Unlike Home Loan, any interest paid before completion of construction i.e. Pre-EMI interest cannot be claimed in 5 equal installments under composite loan. In this case, it is imp to complete construction asap otherwise interest component will add to overall cost of acquisition of Plot / Property. Till 100% disbursement is complete, borrower will pay only Pre-EMI interest.
(c) Commencement of Construction: Under composite loan the construction should start within 1 year. If this condition is not met then Home Loan Provider may either ask borrower to close the Loan or will increase interest rate to commercial lending rate. Normally it is assumed that construction will be completed in 24 months time. Therefore to complete construction within 3 years, Construction should start within 1 year from date of availing loan.
(d) Income Tax Benefits: To avail income tax benefits it is must to complete the construction within 3 years of purchase of plot or availing Composite Loan, whichever is earlier.
(e) Disbursement: Normally there is a misconception among borrowers that they will get complete disbursement at the time of purchase of a plot which is not true. Similar to construction linked plan of a flat, disbursement is in installments which vary from bank to bank. Normally disbursement is released in 5 installments i.e. at the time of
(i) Purchase of Plot
(ii) Commencement of Construction
(iii) Completion of 30% Construction
(iv) Completion of 50% Construction
(v) Completion of 90% of Construction
Borrower has to submit certificate from certified architect / CA certifying construction completion stage and demand letter for next disbursement. Composite Loan Disbursement is solely at the discretion of bank and may vary from above mentioned schedule. Important point is to schedule payment for construction keeping the disbursement schedule in mind. Recently one of my client was in financial mess as her Composite Loan disbursement was scheduled at 30% completion of construction. She promised 60% payment to contractor on completion of 40% construction. The payment schedule for construction should be in line/sync with Composite Loan disbursement to avoid any financial shock.
(f) Loan to Value Ratio: Similar to Plot Loan, The LTV or Loan to Value ratio is normally 80% of Market Value as arrived by Home Loan provider. Actual consideration value is higher compared to Home Loan providers assessment. Normally composite loan value is 60% -75% of actual consideration value
(g) Construction Guidelines: The construction should be strictly according to local rules and regulations as set by Local town planning authority. Any deviation may create problem in future. It is imp to hire a good architect who ensure that construction is as per approved plan (approved by local town planning authority). For example, in some states it is mandatory that construction should be atleast on 40% of the plot. The cost of plot should not exceed more than 50% of composite loan value. Some borrowers avail composite loan and for namesake will construct a single room. After approval of plan, borrower need cost estimation sheet from certified architect / CA. Amount sanctioned under composite loan is not guaranteed till Home Loan provider is satisfied that you are following all the guidelines. Lastly, do remember that composite loan is approved for residential purpose. If you are planning to construct commercial unit then Home Loan provider may ask you to prepay and close composite loan.
(h) Completion or Occupancy Certificate: Unlike flats, the onus to get completion or occupancy certificate rests with the borrower. Not many people are aware that composite loan is considered as plot loan till the borrower submit completion or occupancy certificate. After submission of same, the loan is converted to regular loan which qualify as Home Loan.
(i) External Factors: Last but the least, external factors play imp role in financial calculation. People who have gone through construction phase on plot or land know that its a major headache. It is very difficult to get labour on regular basis. The climate also play havoc many times. It is always advisable to start construction immediately after monsoon i.e. during October or November. It is always advisable to hire a contractor which will hedge the risk of a borrower against fluctuating construction cost. In most of the cases, i observed that cost always go out of control due to external factors which may impact your budget. To avoid all these hassles you should complete construction as fast as you can.
Before you finalize your loan provider, it is critical to check how flexible is your Home Loan provider in case of certain exceptions. Before buying a land for construction, you should discuss with couple of your friends or family members to check practical difficulties faced by them. It will help you to plan better.
Hope you liked the post. You can share your feedback, comments or inputs through following comments section.
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Hi Nitinji,Thanks for for your valuable suggestion. I would appreciate your inputs given in layman manner to us. May i know the best bank to go for composite loan
HDFC Ltd. In banks, you may check SBI.
Hi,
we are 3 friends planning to purchase a plot and construct a house with 3 floors, each should get 1 floor registered.
what I wanted to know here is, will we get a composite home loan for our requirement? if so can you please let us the procedure and banks who offers.
regards,
durga
As you all 3 are friends therefore getting a composite loan seems difficult. You can form a company and can opt for commercial lending at higher interest rate but again it is subject to discretion of banks.
Hi Nitinji,
I have taken two separate home loans for the purchase of plot and construction of home in it. Now I’m facing difficulty in claiming income tax exemption for my plot loan, where it’s not allowed to claim tax benefit for two home loans. Because of this I’m losing the tax benefit from the plot loan interest amount, which is actually for the house construction. How it can be resolved? Thanks in Advance.
Please check my post on this page.
Sir, I am applying for a composite loan in which total ask is about 33L (in which 14L is the for land). 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).
The down payment is on Home Loan amount therefore it will be 20% of 33L. In some cases, bank may relax the criterion in case of composite loan. You can discuss with the bank before applying.
sir i have taken sbi reality home loan in april 2016 of about 468000 . Presently construction not started. Is its interest eligible for tax rebate under section 24 & 80c for the year 2016-17.
construction will start in january with nest installment taken from bank after permission of construction from authority.
ashish kanungo
sir i have taken sbi reality home loan in april 2016 of about 468000 . Presently construction not started. Is its interest eligible for tax rebate under section 24 & 80c for the year 2016-17.
construction will start in january with nest installment taken from bank after permission of construction from authority.
ashish kanungo
You cannot claim any tax deduction till your get the possession of the property.
I have already been taken possession of property in april 2016.
Construction started in January.
You cannot take possession till the construction is completed. The things are not clear how the builder offered possession for an under construction property.
Sir i have taken composite loan fpr purchase of a residential plot from uit ajmer . And registry had been taken in my name.
Possession meaning owner ship
Has been taken now construction started with 1 st instalment
Ok..You have taken a possession of plot. You can claim tax deduction only when the construction is completed.
Hey,
Suppose the composite loan got sanctioned, land is purchased but later on we plan to not construct the home due to some unavoidable reasons. Is there an option to pre close the loan without construction?
You can pre-close at any stage.
Dear Sir
I am Planing to avail composite loan in my spouse name and co applicant is me and loan will be detected in my salary. Once finished contraction shall i able to claim TAX under 80cc , Please confirm me sir .
It depends on the property ownership i.e. you and your wife are joint owners or she is sole owner of the property.