Oct 13, 2023Homes and People

Composite Loan Overview, Interest Rates, and Tax Benefits

by Godrej Properties Limited

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Composite loan for a home loan

For buying a house, some individuals accumulate savings over the years and secure distinct loans for the plot and home. Others prefer the expediency of a composite loan, facilitating swift homeownership. This comprehensive guide delves into the intricacies of both loan options, equipping you with valuable insights to make an informed choice for your ideal home.
 

What is a Composite Loan?

A composite loan means financial aid to help individuals acquire a plot of land and build a house on it within a specified timeframe. These types of loans are offered by banks and financial institutions. This is basically a mix of both plot loans and construction loans. So, it encompasses the expenses associated with land acquisition and house construction. 
 

Key Points to Note Before Applying for a Composite Loan

Most lenders mandate commencing house construction within 1-2 years under composite loans. Non-compliance may lead to higher interest rates or loan repayment demands. Unlike a single lump sum payment, a composite loan is disbursed in three stages:

  • Upon land purchase
  • When construction of the house begins
  • In stages, as construction progresses

To determine the plot construction composite loan interest rate disbursement amount, you must provide your construction plans and a detailed cost breakdown to the lending institution or bank.
 

How is a Composite Loan Different from a Land/ Plot Loan?

A composite loan seamlessly combines plot cost and home construction expenses, streamlining the land acquisition and building process within a specified timeframe. In contrast, land/plot loans are tailored for residential land purchase, ideal for investors deferring construction plans.

Composite loan interest rates, covering both land and construction, feature rates from 7.25% to 10.05%, varying by the lending institution. Conversely, land/plot loans, focused solely on land acquisition, range from 7.7% to 13%, contingent on the bank and principal amount.

The Loan-to-Value ratio (LTV) is critical; composites offer up to 80% coverage, requiring a lower initial investment. Land/plot loans provide approximately 70% LTV, demanding a comparatively higher initial sum.

Tax benefits favor composite home loan borrowers, allowing up to Rs. 2 lakhs on interest and Rs. 1.5 lakhs on principal repayment. However, long-term land investors under plot loans lack similar benefits.

Loan repayment duration flexibility is a composite loan advantage, spanning 10 to 30 years, tailorable to financial capacity. Land/plot loans typically offer shorter 10 to 20-year plans.
 

Eligibility Criteria for Composite Loan vs. Land/ Plot Loan

  • Age Limit: Applicants must be between 18 to 70 years old.
  • Employment Type: Both self-employed and salaried individuals are eligible.
  • Residency: Resident Indians and NRIs can apply for composite and land/plot loans.
  • Additional Factors: Income, assets, liabilities, business continuity (for business owners), and work experience (for salaried applicants).

Basic Documentation Requirements for Composite Loan vs. Land/ Plot Loan

Below is a compilation of necessary documents for both composite loans and land/plot loans:


Composite Loan

Land/Plot Loan
Duly filled and signed loan application formPassport-sized photographsProof of identityProof of residencyIncome proofEvidence of employment/businessDocuments related to the plots/landCompleted application formAddress proofProof of incomeProof of ageEvidence of employment/businessDocuments about plots/land, including layouts and drawings approved by the respective authority

 

Frequently asked questions

1. What is the difference between a home loan and a composite loan?

Ans: A home loan is specifically for purchasing or refinancing a home, while a composite loan combines funds for both purchasing land and constructing a home on it within a specified timeframe.

2. Can we claim a composite loan?

Ans: By completing your house construction within three years, you become eligible for tax benefits on your composite loan.

3. What are the benefits of a composite loan?

Ans: The composite loan tax benefits include combining land and construction costs and tax incentives. 

4. What is the duration of the composite loan?

Ans: The duration of a composite loan typically ranges from 10 to 30 years.

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