Want a dream house that matches your exact taste? Then it’s best to build one! Doing this gives you complete control over layouts and dimensions, and the best part? It works out a lot cheaper too. Yes, you heard that right.

Most leading lenders provide a composite loan to home loan borrowers like you to help cover purchase home building costs. This way, you can cover loan costs without dipping into your finances. But what are these loans? More importantly, should you opt for them or not? Let’s find out.

What is the composite loan scheme?

In simple terms, a composite loan is a type of housing loan that covers all aspects of home building. This includes the purchase of land, home construction charges, and the like. With this information alone, one might think a composite loan scheme is pretty similar to regular home loans.

The key difference? A composite home loan scheme allows you to purchase land and construct a house within a given timeline. And if that wasn’t enough, most leading lenders make composite housing loan repayments even easier by offering affordable interest rates.

Keep in mind that unlike regular housing loans, lenders do not disburse the total funds of a composite housing loan at once. In this case, the housing finance company initially disburses the loan amount for the plot purchase while you get the rest of the loan amount at the different construction stages.

This also means you need to only pay a partial EMI until the loan gets disbursed completely, making loan repayments easier for you. The financial institution also monitors the construction developments and releases the second tranche of a loan after you achieve a particular completion stage.

Now that we know all about what the composite loan scheme is about, let’s understand who can avail them, shall we?

Eligibility criteria for composite housing loan

The eligibility criteria for a composite housing loan are as follows.

  • You must be between 18 to 65 years of age
  • You must be an Indian resident or Non-Resident Indian
  • You must be a self-employed professional or self-employed non-professional
  • Before applying for a composite loan scheme, you must be residing at your current address for more than a year
  • You must have a good credit score (ideally over 750 points)

Fulfilling the above eligibility criteria not only quickens the loan approval process but also helps you secure funding closer to the composite loan limit.

Documents required

While eligibility criteria are one factor, you need to present necessary documents when applying for acomposite home loan. What’s more, these criteria differ slightly for salaried and self-employed individuals. Take a look at the documents required for yourself.

For salaried employees

  • Identity proof: Valid Passport, Aadhar card, Voter Id card, valid driving license, PAN card, etc.
  • Address proof: Utility bills, Aadhar card, Passport, etc.
  • Income proof: Income tax returns, latest form 16, salary slips of last three months, salary account statements showing salary of previous six months.
  • Other documents: Contribution proof, Appointment letter if the employment is less than 12 months, bank statements to show the repayments towards any ongoing loan, processing fee cheque if applicable, dually filled loan application form.
  • Property-related documents: Title deed of plot, construction estimate assessed by a civil engineer or an architect and a copy of the sanctioned plan by local authorities.

For self-employed individuals

Self-employed individuals need a few extra documents to secure a composite home loan. These include a duly filled form 26 AS, a business profile, partnership deeds if you have a partnership firm, a d even a list of shareholders and directors if the firm is listed as a company.

Interesting Facts About a Composite Loan

  • They are different from land loans

A composite loan and a land loan are different. How? The former is a combination of land and construction loans. These loans are more cost-effective than land loans as they include land and construction charges under one loan application. If you plan to start construction immediately, then opt for a composite loan, while if you plan to construct later, you can opt for a land loan.

  • Composite loan interest rates are higher

A home loan is suitable when moving into an under-construction or ready-to-move house. However, composite loan interest rates are higher than a standard home loan rate.

  • Immediate construction is a mandatory requirement to avail of this loan

To avail of this loan, construction is mandatory immediately. In fact, you need to start construction when specified by the financial institution. Typically, lenders ask you to begin home construction within one to two years of availing a loan. If you fail to do so, the lender may charge you high composite loan interest rates or ask you to repay a loan amount and close it.

  • Composite loan limit

The composite loan limit amount is based on your loan repayment capacity which ranges from Rs. 0 to 15 crores.

  • Disbursement is done in stages

Financial institutions disburse a housing construction loan in a few stages according to the stage of home construction. These are lump-sum payments, and if you didn’t know already, lenders disburse a pre-decided sum even before the construction begins.

  • Composite loan tax benefits

To avail the composite loan tax benefits, you must complete the home construction within three years from when a lender sanctions the loan. After construction is complete, you must get a completion certificate from an architect to avail of tax benefits of Rs. 1.5 lakh on repaying the principal amount and Rs. 2lakhs on interest repayment every year.

  • Get up to 80% of funds through a composite loan

With composite loans, you can get up to 80% funding from a financial institution right after submitting the land and construction cost proofs. However, the funding depends on your credit history, repayment capacity, etc.

  • Prepayment charges

If you opt for a fixed interest rate, you need to pay prepayment charges. Whereas, if you are on floating composite loan interest rates, you need not pay the prerequisite amount. Keep in mind that prepayment charges also vary between lenders.

Final thoughts

Building a home from scratch is the most challenging thing, but a composite home loan facility takes care of financing and making your dream come true. However, you must start with finding your perfect dream spot to construct a home, shortlist a civil engineer and finally choose a lender. Then, scout the market for competitive composite loan interest rates to ultimately avail of composite loan tax benefits.

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