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Characteristics of Composite Home Loans

composite home loan

What composite home loan?

The composite home loan is a loan drawn out by banks and financial institutions to buy or procure a plot of land for constructing a house on it within a given time frame. You can call it a combination of the plot loan and construction loan. Here the cost of both land or plot and construction of the house is included.

An important aspect of a composite loan is that it is not handed out as a lump sum amount. The doling out of a composite loan takes place in defined parts and in a pre-defined time period. For example, if the first disbursement will take place when you buy the plot, the rest of the disbursements will take place as and when the construction of the house progresses on the piece of land you have purchased (i.e. just like in case of construction loans). The disbursement of the amount is based on the level of construction of the house as and when it happens.

The purpose of composite loans-

1: Purchase of plot or site and receipt of the land documents

2: The construction of a house on the purchased land according to the construction plan approved by the concerned authority.

The permissible time for completion of construction-

Most lenders demand a declaration from home loan applicants regarding the completion of construction within a pre-decided period of time (mostly ranges from 3 to 5 years), from the date of possession of the plot.

Completion of construction would mean completion of at least 80 percent according to the project plan and as certified by the bank’s impaneled valuator.

Closure of Composite Loans

As per Reserve Bank of India (RBI) guidelines, floating-rate composite loans are free from all foreclosure and prepayment charges. You must pre-check the clauses governing foreclosure and pre-payment charges of composite loans in the home loan agreement.

Guidelines on sanctioning composite loans

Following conditions have to be fulfilled for a composite loan to be sanctioned:

  • A reasonable estimate of the cost of construction of the house is mandatory
  • The estimated cost has to be substantiated by an architect or a chartered accountant
  • A technical report is required to evaluate the progress and level of construction.

Features of Composite Loan

 (a) When is Composite Loan helpful: Composite Loan is beneficial only if you are planning to start construction immediately or in the near future.

(b) Pre-EMI Interest: Pre-EMI interest cannot be claimed for installments under a composite loan, the construction has to be completed, or else interest component will be added to the overall cost of acquisition of the property.

(c) Commencement of Construction:  The construction should start within 1 year if you have undertaken a composite loan and if this is not done, then the lender may either ask a borrower to finish up the Loan or will increase the home interest rate to commercial lending rate.

(d) Income Tax Benefits: To get benefits from income tax the construction must be completed within 3 years of the purchase of land or availing Composite Loan, whichever is earlier.

(e) Disbursement: Like the construction linked plan of a home, the disbursement is done in installments but it might vary among lenders. Generally, disbursement is released in 5 installments. at the time of – Purchase of Land, Beginning of Construction, On Completing 30% Construction, On Completing 50% Construction, On Completing of 90% Construction.

(f) Construction Guidelines: The construction has to be according to rules and regulations as set by Local town planning authority, deviations may cause the problem in the future. A composite loan is approved for residential purposes only.

(g) Completion of Occupancy Certificate: A composite loan is considered as plot loan until the borrower submits the completion or occupancy certificate. After its submission, the loan is converted to the regular loan which qualifies as Home Loan.


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