Do you dream of building a house with a private gym or a swimming pool? Do you want to own a vacation home in the mountains or facing a beach? Well, building a home gives you the freedom to customise it according to your wants and style. But it can also cost a fortune.
If you’re thinking of building a home to suit your aesthetics, a composite loan is the best tool to finance your dreams. A composite loan is a credit taken for purchasing land and building a house on it.
In this blog, we'll understand the composite loan meaning and look at other important details you must know before applying for one. Let's dive right in.
Composite Loan Meaning
A composite home loan allows you to buy land and build a home on it within a given period. In simple words, a composite loan meaning is when you combine land and construction loans. But how do you know if a composite loan is right for you?
Well, if you want to start the construction of your house immediately after buying the land, then you must get a composite loan. However, if you're planning to buy the land now but begin the house construction after a few years, then a composite loan is not the best option for you.
This is because a composite loan requires you to complete the construction within a given period after taking the loan.
But before you proceed with your application, here are 10 things you must know about the composite home loan-
A composite loan is not the same as a land loan
Lenders extend a land loan to only purchase a plot or land. However, a composite loan scheme includes both land and construction cost. While applying for a composite housing loan, you have to share your construction plans with the lender. Therefore, if you plan to start the construction at a later stage, apply for a land loan.
Composite loan interest rates are higher than regular home loans - H2 Tag
Home loans attract the cheapest interest rates among all loan products. Lenders extend home loans to buy a ready-to-move or an under-construction house. However, composite loan interest rates are slightly higher because it serves two purposes- buying land and constructing a house.
Constructing a house is mandatory
With a composite home loan, it is mandatory to construct a house on the land you purchased. Therefore, if you do not plan to start construction within the next year or two, availing of a land loan will be a better choice.
You must start constructing the house soon
Most financial institutions require you to start constructing the house within 1-2 years under their composite loan scheme. If you fail to do this, the lender can increase your composite loan interest rates or ask you to make the repayment and close it.
Lenders disburse the loan in tranches
While availing of a composite housing loan, you will not receive the entire loan amount in a lump sum. The lender will disburse the loan in three stages-
Stage 1- When you purchase the land
Stage 2- When you begin constructing the house
Stage 3- Released in installments as construction progresses
You must submit your construction plans along with a breakup of costs to the lender. This will help to determine your composite loan interest rates and the amount of disbursement.
You will receive the composite loan amount in your personal bank account
Financial institutions will disburse the loan amount in instalments directly to your bank account. Since you have already shared the construction plans with the lender, make sure you use your composite housing loan only to buy land and construct the house.
You can take composite loan tax benefits
If you complete the construction of your house within 3 years, you can enjoy composite loan tax benefits under the Income Tax Act. After you complete the construction of your house, you can start taking composite loan tax benefits for the principal amount and interest paid every year.
A completion certificate is required to enjoy composite home loan tax benefits
After completing the construction of your house, you must submit the completion certificate to your lender and start making your EMI payments. You can start taking composite home loan tax benefits from the year of completion of construction.
NRIs are also eligible for a composite loan
NRIs are equally eligible to apply for a loan as other Indian citizens. The loan application and disbursement process are the same for all.
Lenders approve up to 80% of your land and construction cost
When you avail of a composite loan scheme, you can fund up to 80% of the total cost. Lenders will evaluate the estimated land and construction cost based on the documents you submit and extend credit for up to 80% of this value.
Composite Home Loan Eligibility Criteria
The eligibility criteria for a composite loan will vary from lender to lender. But there are some common conditions that you must fulfill before submitting your application. These include-
- Your age must be between 18 and 70 years
- You must be an Indian citizen
- You must have a stable source of income whether you are salaried or self-employed
- You must have a good credit score
Composite Loan Tax Benefits
Similar to a home loan, you can enjoy tax benefits on a composite loan too. But composite loan tax benefits come with a condition - you must complete the construction of your home within three years from the loan sanction.
Remember, for the duration of the construction, you will have to pay regular EMIs as per your agreement. Once the construction is complete, you can start claiming tax benefits every year on your principal and interest payments.
These benefits are covered under different sections of the IT Act. You can claim a tax benefit of up to Rs. 1.5 lakh on the principal repayment amount and up to Rs. 2 lakh on the interest.
Documents Required for a Composite Loan
The documents required to apply for a composite loan differ from lender to lender. Some common documents include-
- ID and address proof
- Last six months' bank account statement
- ● Last three months' salary slips
- Proof of business
- Form 16 or ITR files for the last two years
Construct your dream home with Tata Capital
From choosing the right architect to comparing different schemes for a composite home loan, building a house has a whole set of challenges. But in the end, it is all worth it when your house looks exactly the way you dreamed.
But if you’ve found your dream house that is ready to move or under construction, you can easily finance it with Tata Capital’s affordable home loan. Besides a simple loan process and affordable interest rates, you can also enjoy other benefits like flexible loan tenures, easy repayment plans, and much more. So, whether you’re buying a new home or renovating an existing place, we have got you covered for all.
31 May 2022
6 mins read
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