Understanding Composite Loan For Purchase of Land and Construction of House

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If you are one of those that believe in owning a place of your choice or which suits your taste, you need to buy and construct instead of option for an apartment.

Buying a home of an other person's choice must be difficult for you. If you are looking to build your own dream home than here is the required details for you with regards to your composite home loans requirements.

What is Composite Home Loan?

Composite loan are loans which are given to an individual who plans to buy a plot on loan or to construct the home on the same within the stipulated time mentioned by the bank.

Therefore a composite home loan means a loan that can offer you loan to buy a land, and also provide you money for construction of a house.

Composite Loan For Purchase of Land and Construction of House

Other details about the loan

Banks generally lend between 50 per cent and  80 per cent on the market value of the plot. However it depends on the several factors and from banks to banks. Loan amount depends on factors such as:

* Income generation and repayment capacity of the borrower, which goes without saying.
* Generally banks lend considering the location of property. They may obviously prefer within city limits.
* Age of the borrower.
* Other source of income like interest from bank deposits or rental income could also play a crucial role in determining the quantum of the loan.
*Property documents.

In the beginning bank the bank of housing finance company will disburse an amount for only purchase of the plot and rest of the amount gets disbursed in different tranches depending on the construction activity.

Until, the loan is disbursed completely, the borrower needs to pay pre-EMI or partial EMI on the loan amount disbursed.

The bank closely monitors the development of the construction and it releases the second tranche of loan only after the completion of the certain stage.

Documents to avail Composite Loan

  • Land loan application form with photograph
  • Identity proof, 
  • Residence address proof, 
  • Latest salary slip, form 16, 
  • Six months' bank statement
  • Processing fee, if applicable. 
  • Copy of Allotment Letter / Buyer Agreement
  • Title Deeds including the previous chain of the property documents in resale cases
  • Own Contribution Proof

Taxation on Composite Loan

If one is looking to avail tax benefit from the composite loan, than one should complete the construction within 3 years of purchase of land.

The tax deduction will be applicable in the last year under 80C. If you are looking for loan for only investment purpose than you are not eligible for any tax deduction.

Other important conditions

  • Some banks may offer higher interest rates on land loan when compared to home loans.
  • Tenure of the loan could be less.
  • If the construction does not start or complete on the stipulated time, it may attract more interest or at times bank may recall for the loan.

Closure of Loan

As per the Reserve Bank of India, guidelines a floating rate home loans are exempt from prepayment charges. There are certain conditions levied by the bank on preclosure depending on the employment details and tenure of the loan.

While Sanctioning the Loan, you need to do the following:

a) Provide the cost estimate for construction
b) Estimate should be validated by an Architect or a Chartered Accountant
c) During sanctioning loan banks consider the market value as well as the cost of property as per sale deed.


Read more about: home loan
Story first published: Thursday, March 12, 2015, 12:22 [IST]
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