What are Composite Loans?

Loans where a lender gives you money not only for procurement of land, but also for construction of a house, are termed composite loan.

Huge apartment complexes, luxury villas and independent bungalows have mushroomed throughout the city. Projects are getting overbooked in localities with business and industrial activity. Affordable interest rates offered by most banks have fuelled heavy activity in the real estate sector. Manoj intends to purchase a piece of land at an affordable rate. He may choose to either sell the land once its value appreciates, or build his own house after a few years. Will he be eligible for a loan to purchase a plot?

There is good news for people like Manoj. Banks offer loans at competitive rates for purchasing a plot. You can either construct a house on it, or simply hold on to the land as an investment. Some lenders insist that you have to construct a house within a year or two of purchasing the land. So, not only do they offer you loan to buy a piece of land, but also provide you money for construction of a house. A plot can be purchased purely for investment purposes. It appreciates and yields manifold returns. Loans where a lender gives you money not only for procurement of land, but also for construction of a house, are referred to as composite loans. Manoj can get as much as 85% of the cost of the land from bankers. The minimum loan amount is Rs 3 lakh for most banks. The loan tenure varies from one to 20 years. Also, most banks lend only if the site falls under the municipality limits. Additional sops like free accident insurance cover packaged with the land loan are also on offer. Shop around and compare interest rates, just like you would for a home loan. A difference of a few percentage points could translate into savings of a few thousand rupees.

Resident Indians, as well as non-resident Indians (NRIs), in the age group 18-50 years, with independent and regular source of income, are eligible to apply for these loans. For those above 50 years, some lenders impose certain restrictions like shortening of maximum repayment period, or co-obligation of spouse/children. Documents required for applying for a land loan include filled application form with photograph, identity proof, residence address proof, latest salary slip, form 16, six months’ bank statement and processing fee, if applicable. While banks lend for purchasing a site, some insist that the borrower must undertake to commence the construction of house, after completing all formalities, within a maximum period of 12 months, with or without availing of more finance for this purpose. The site value should not be more than 50% of the total project cost. The maximum repayment holiday permitted, including the construction period, is 24 months.

If the borrower fails to keep up the undertaking to commence construction within 12 months or sells the site, the loan is treated as misused and attracts interest at commercial rates; then the loan has to be repaid at once. Many other financial institutions do not bother whether you buy the land purely for investment purposes or desire to construct a house on it. Before you finalise the loan agreement, get a clear picture whether your bank has any such clause attached to it or not. To start his construction project, Manoj can either top up his existing loan or avail of a new construction loan. A composite loan scheme meets your requirement of both purchase of site and construction. Permitted margin money has to be maintained in both the stages of land purchase and construction. The portion of the margin towards construction has to brought in before the first disbursement towards construction.