Everything to Know About Composite Home Loan

The thought of building your own home can be exciting. You can plan and design the home just the way you want to suit your preference, needs and taste in aesthetics. After all, you would want your home to reflect your personality. And, if you're going to buy land to construct your home, applying for a composite loan can help you get the desired funds and accomplish your dream of being a homeowner.Let us know more about the composite home loan.

In India, financial organisations offer different types of home loans, including land loans, home construction loans , etc. A composite home loan is different from a regular plot/land or home construction loan. It is a combination of land and construction loans.When you apply for a composite loan, you must inform the lender about your plan to build or construct a home on the land. You must submit your construction plan and the approximate construction cost along with other documents to support your application. Accordingly, the lender will approve and disburse the sanctioned loan amount in tranches.It is advisable to apply for a composite loan only if you plan to start the construction of your home immediately after you purchase the land. If you want to defer the building later, you can opt for a standard land loan.

A traditional home loan is one of the cheapest loan products in India. You can avail of a home loan to purchase a ready to move or an under-construction property. You can get a home loan at interest rates from 6%. The interest rate varies based on several factors like age, the amount borrowed, credit profile, etc.In contrast, land and composite loans have a slightly higher interest rate than a standard home loan . Experts suggest that a composite home loan is more cost-effective than a land loan as it includes the interest for both land purchase and home purchase in a single loan.

When you avail of a composite loan, you must build a home on the plot you purchase. This is a mandatory requirement. If you don't start the construction within a specific period, the lender may increase the interest rate. So, it is advisable to take a composite loan only if you want to start building a home within one or two years of purchasing the loan.

The disbursement process of a composite loan is different from a land loan. The lenders disburse the amount in smaller instalments and the payments in three phases, which are:

• Land purchase the lender disburses the full sanctioned amount in a lump sum.
• Starting the construction the lender disburses a specific percentage of the sanctioned amount upfront to start the home construction immediately.
• Completion of construction as the construction progresses, the lender releases the amount in tranches.

When you apply for a composite loan, you must submit details of the cost breakup for plot purchase and construction. You must also submit the construction plan. Based on the plan, the lender will disburse the amount.

Like a standard plot or home loan, the lenders fund only 80% of the estimated cost, including land purchase and home construction. This means you must submit proof of the land and construction costs and get a loan up to 80% of that value.The amount you get depends on the lender's assessment of your credit and personal profile. You must bear the remaining 20% cost from your pocket. So, it is advisable that you assess your finances and make the necessary arrangements for funds to avoid delay.

Every year, several NRIs apply for a home loan in India. And those who want to construct their own home can apply for a composite loan. The process for application and disbursement of funds for the NRIs is the same as resident Indians.

When you apply for a regular home loan, the lenders usually disburse the amount in a lump sum directly to the builder/developer or seller's account. But the disbursement process in a composite loan is different.
The lenders disburse the amount to your personal bank account. Since the bank has your construction plan, you must only spend the funds for buying the land and home construction purposes.

Just like the regular home loan, you can avail of tax benefits on a composite loan provided you complete the home construction within three years from the date when the lender sanctions the loan.When the home construction is going on, you must pay the EMIs or pre EMIs based on your agreement with the lender. When the construction is complete, you can start taking tax benefits every year on the repayment of both principal and the interest amount.The tax benefits on loan repayment are covered under different sections of the Indian Income Tax, 1969. You can get a tax benefit up to Rs. 1.5 lakhs on repayment of the principal amount and Rs. 2 lakhs on interest repayment.

The documentation for a composite loan may vary from lender to lender. But generally, the lenders ask the borrowers to submit the following documents:

• Loan application form duly filled and signed
• Passport size photographs
• Proof of identity and residence (Aadhaar card, passport, driving licence, voter ID card, PAN card)
• Bank account statement for last six months
• Salary slip
• Proof of business existence
• TDS certificate, ITR files for last two years or Form 16

Building your home comes with different challenges. You must first find the right plot to construct your home, shortlist an architect, compare the loan offers from different lenders, etc. But all that will be worth it when you accomplish your dream space.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.