Understanding Composite Loan For Property Purchase and Construction of House in Hyderabad/Telangana

Hyderabad, also known as the city of Nawabs is presently relishing extensive growth. While the real estate market is sluggish in a majority of the cities across the country, the realty sector in Hyderabad is constantly flourishing. According to a recent survey, the capital of Telangana has recently become one of the most bustling real estate markets in India, with both residential and commercial properties bestowing steady performance over the years. 

The presence of a large number of diverse industries is what makes more and more people invest in properties in Hyderabad. This is what has led the property purchase prices in Hyderabad to skyrocket. Hence, if you are planning to purchase a plot of land in this city for constructing your house, it is a great decision. Constructing a home is a lengthy process that needs you to be on your toes all the time as you always will hold a lot to deal with. Apart from this, the construction and the land costs can overburden your finances. Hence, if you want to save up on your expenses, you can always apply for a composite loan that includes both the land purchase and construction costs. 

Understanding Composite Loan For Construction of House and Purchase of Land

When you decide to build a home in Hyderabad, taking different loans for both land and house construction can easily overburden your set finances. This is the time when a composite loan steps in. A composite loan is a type of loan facility that is extended by banks and financial institutions to acquire land and to meet the expenses of your house construction. 

This type of loan is most suitable for people who wish to live in an independent house rather than residing in flats or apartments. With the help of this loan, it becomes extremely easier for you to manage your construction expenses without getting over budget with your finances. A composite loan is further regarded as a plot plus construction loan. It can additionally be deemed as a kind of home loan offered to people who are looking to purchase a plot to construct a house on the same within the next few years. 

This composite loan is usually disbursed in multiple installments that are generally regarded as tranches. The initial tranche of this loan is usually disbursed at the time when you purchase the plot, while the remaining three tranches are delivered as the construction of your house advances.  Once you select the plot that you contemplate buying land for your house construction in Hyderabad, you can then approach a bank or a financial institution to obtain such a loan.

Comprehending the tranche system

When you apply for a Composite Loan for your house construction, you need to let the bank or a financial institution know how you plan to distribute the capital between the expenses of buying land and building a house. This information about the distribution of expenses will allow the banks or financial institutions to define the quantum of loans distributed to you at numerous levels of the construction. 

The sum needed for land purchase will be transferred to your account initially while the amount necessitated for construction will come in tranches. Banks or financial institutions always strictly monitor your construction progress to assure that the funds allocated are not being utilized for any distinct purpose. 

You are further expected to submit to banks and financial institutions a certificate of completion of construction that must be duly attested by an architect or a Chartered Accountant to demand the release of the subsequent loan tranche. 

In addition to this, the banks and financial institutions hold the complete power to cross-examine the same with the help of their valuation agency. This valuation agency might also visit your construction site to validate the same. 

Interest rate, repayment, and loan tenure

In the case of a Composite Loan for house construction, the loan is considered to be completely dispersed upon the release of the final tranche. The borrower is expected to pay just the pre-EMI amount until the total sum is disbursed. You must note that your bank or financial institution is obligated to disburse the entire loan amount within 2-3 years of approving the said loan. 

However, banks and financial institutions hold all the rights concerning the disbursement of a composite loan in different tranches. In addition to this, the rate of interest charged on a loan might also fluctuate from bank to bank. 

Additionally, if the house construction is not accomplished within the expected time, there is even a possibility that you would be required to pay additional interest or the bank or financial institutions may even recall the loan. The tenure for this loan customarily extends anywhere from 1 year to 20 years. However, this course does not spread beyond the retirement age which is  60 years, except in the case of a self-employed individual where the loan tenure can extend up to 65 years.

Loan Amount

Banks and financial institutions normally finance around 50 per cent to 80 per cent of the market assessment of the land. This amount can also differ from one bank to another and it entirely depends on the below-mentioned factors:

• Repayment capability of the borrower
• Area of the property (inside or outside city boundaries)
• Kind of allotment (resale or direct allotment by developer)
• Age of the borrower
• Income sources (interest on investments, rental income, etc.)

When banks and financial institutions issue a composite or land+construction loan for house construction, they always analyze both the cost of the property purchase as well as the market value of the property as mentioned on the builder allotment papers or the sale deed. The market value of the property is usually presented to the bank by the architect.

Composite loan plan rules

When you apply for the aforementioned loan in any bank or financial institution, it is expected that you are taking this loan for house construction and that place will be self-occupied by the person obtaining the loan. Apart from this, the home construction must always include at least 25 percent of the total plot area and must qualify to be a dwelling unit. The construction or a part of the construction of the house must be owned by one person or by two or more persons who manage a standard household.

While the banks and financial institutions will escort you along the way once you wish to take out a loan, in general, the process involves the following points:

• The borrower has to present the cost estimation for the development of the dwelling unit at the time of obtaining the loan.

• The estimated cost presented must be certified by a chartered accountant or an architect. 

• For a construction loan, the bank or financial institutions can finance anywhere between 70 per cent to 90 per cent of the total construction estimate. However, the maximum loan-to-value ratio must never exceed 80 percent (this limit diversifies as per the in-house policy of the banks or lenders).

Points to remember about composition loan

Owing to the essential nature of a home loan product, the disbursement and approval process of a composite loan is somewhat distinct from the other home loans. The main reason for this is due to the tremendous default risk correlated with it. The risk factor is usually higher for a yet-to-be constructed n independent house when compared with the under-construction project of a licensed builder or a pre-constructed project. Mentioned below are a few points that you must keep in mind while applying for this loan. 

• Composite loans are distinct from land loan

While applying for this loan, you must always keep in mind that these loans are never absolute land loans. Banks and financial institutions usually offer various loans such as land loans, construction loans, and home loans along with a land+construction loan. The land+construction loan is what is usually regarded as a composite loan. 

When you apply for this kind of loan in any bank or financial institution, you will be required to familiarise yourself with all your construction plans. In addition to this, you will always have to submit all your layouts and plan for house construction so that banks can approve your loan along with dividing and disbursing the loan amount in suitable tranches. 

Another point that you must note is that a composite loan can only be taken when you are planning to start house construction immediately. If you intend to commence the construction later, then in that case you must opt either for a land purchase loan or must apply for such loan later when you start the construction. 

• The rate of interest on these loans is slightly higher than conventional home loan

A conventional home loan is always regarded as one of the most affordable loan products that banks or financial institutions offer. However, a home loan is usually granted for purchasing a ready-to-move-in house or an under-construction house. However, when we talk about composite loans, they are usually granted for obtaining a plot along with the house construction from the scratch. 

This is the reason why the rate of interest charged on these loans is a bit higher when compared to a standard home loan.  However, you must note that this loan is far more cost-effective than land or a home loan as with this loan you can easily construct your desired home rather than settling for a pre-constructed one. 

• Payment of composite loans is usually done in tranches

When you plan to opt for this loan, you must note that the disbursement of these loans is done in the following way. 

1. The loan amount for the land purchase – Disbursed upfront
2. The partial sum for construction – Possibly upfront if you plan to start the construction immediately.
3. The remainder loan sum for construction – Usually disbursed in tranches as construction proceeds

When you obtain a composite or land + construction loan, you will have to present the bank with a break up of expenses for plot and construction. You additionally ought to present a development plan. Based on this layout, the bank will distribute the loan sum in tranches. An evaluator appointed by the bank will then evaluate if your construction is proceeding as per the layout. Once the evaluator is satisfied with the progress, only then the further amounts will be disbursed.

• The loan sum is always disbursed to your individual bank account

When you obtain a regular home loan from a bank, the amount of that loan is always disbursed directly to the builder’s account. However, this is not the case with a composite loan. Under this type of loan, the banks or financial institutions will straightaway disburse the amount of loan i.e. the amount for land purchase and the payment of remaining construction in tranches directly to your personal bank account. 

Although you must always secure these funds only for construction purposes as the bank holds your construction plan and the evaluators can visit for an inspection anytime. If the evaluators feel that the construction is not going as per the layout, the bank in that case might hold your loan disbursement or even cancel your loan. 

• Gradual progress would affect the loan disbursement

Banks and financial institutions usually hold pre-decided stages of construction advancement for loan disbursement. The most common signs are ground level, lintel level, cement work and then the ultimate level. Hence, you must note that the pace of construction always holds a direct influence on the disbursement of the loan amount. The bank or financial institution always holds the right to stop the payments if your construction project is delayed or stretching a lot.

• You cannot change the construction plan 

Loan applicants of this required loan usually question if they can obtain a construction loan from a bank or financial institution to build two or three floors and then build only one or vice versa. The straightaway answer to this question is, No! 

Banks generally hold a unit in place that keeps consistent surveillance on your construction progress. Any divergence from the original plan presented during the application process, be it expansion or contraction, may compel the bank to suspend the loan and hold disbursement.

• The expense of interiors are not included in the composite loan 

Another point that you must keep in mind while obtaining this loan is that it simply includes the cost of permanent features of constructing a house. Hence, any expenses contracted while setting up the furniture, interiors, plumbing, lighting and other such components, would have to be funded by the borrower.  However, if you feel that you do not hold ample funds for the interior work then you can always get in touch with the bank who can provide you with some other loan products for your assistance. 

• Pre-EMI interest remittance

Under a composite loan application, you will always be required to pay pre-EMI during the construction phase of your property. This sum is usually the applicable interest on the loan amount that has already been disbursed and excludes the original EMI value and loan duration. Once your property is fully constructed and the final loan tranche is issued, the original loan repayment duration starts. 

Documents to avail Composite Loan

Nowadays, applying for and obtaining a composite loan have become extremely easy as you can instantly apply for such a loan online with few clicks. However, you must always note that instead of opting for the initial bank that you see online, you must always take a look at all the leading financial institutions providing the desired loans and compare all their offerings. 

You can always compare the interest rates that are charged by different banks along with evaluating their terms and conditions on the loan disbursement and the repayments to make an informed decision. While some of the deciding factors can vary from one bank to another. The list of documents that you will be required to submit for obtaining a loan remains the same. Hence, assist you in making your paperwork strong for the loan approval, mentioned below is the list of documents that you will require to avail a composite loan. 

• Properly filled and endorsed loan application to receive a loan
• Recent passport size photographs
• Proof of identification(This can include a copy of voters ID Card or Aadhaar Card or Driving Licence or Passport or a PAN Card)
• Verification of residence(This can include a copy of Aadhaar Card or latest electricity bills or property tax receipt or a voter Id card or a passport) 
• Signature identification along with a proper KYC (Know Your Customer) verification from an existing bank or financial institution. 
• Passbook or bank account statement for the last 6 months
• Individual Assets and Liabilities Report

In case if you are salaried then the proof of income for salaried persons include:

• Original salary certificate from the present employer
• TDS (Tax Deducted at Source) Document on Form 16 or a copy of filed Income Tax Returns for preceding 2 Financial Years, rightfully acknowledged by Income Tax Department.

Proof of income to be submitted by self-employed/ professionals/ other IT assesses:

• Verification of business location
• Accredited copies of the Income Tax returns or the assessment orders for the preceding 3 years.
• Copies of challans confirming the payment of advance Income Tax

Eligibility criteria for composite loan

If you are planning to apply for composite home loans from any leading bank or financial institution then you must always check your loan eligibility to evade unnecessary loan refusal. The standard composite loan eligibility guidelines are as below:

Requirements for composite loans

While the fundamental eligibility guidelines and documentation list are equivalent to any other home loan product. You will be required to submit proof of income, employment and identity, which would enable the bank to evaluate your loan repayment capability.  

In the case of composite loans, banks hold strong power over the application of credit and meticulously control the borrower’s property purchase records and construction estimate. Hence, you must always ensure to take into consideration the two important factors before applying for this loan. 

• Get your property records ready – Since the land purchased for your house construction serves as a security and remains mortgaged with the bank until the loan is completely repaid, banks thoroughly examine the property records like the sales deed, NOC and approved plans from the municipal administrations along with the legal status of the land.  

• Get your building plans ready – Presenting a makeshift construction plan that is subject to alteration would lead to a loan request getting rejected. Hence, you must always ensure that the submitted plan must explicitly include specifications like boundaries, floor plans, the value of the property, the purpose of the property, details of suppliers, total cost, list of inventory along all the projected profits.

Taxation on Composite Loan

The interest that you pay on the repayment of your composite loan is exempted under the Income Tax. According to Section 80C of the Indian Income Tax Act, 1961, you can easily receive an exemption on the primary repayment amount of your acquired loan up to a maximum amount of Rs 1,50,000 per year. This principal sum refers to the exact loan amount obtained from the bank.

The bottom line 

With meticulous outlining and a great contractor, you can easily enhance the chances of your requested loan application getting accepted with affirmative terms. Hence, if you have recently obtained land in Hyderabad for house construction and are now looking for a good construction company that can assist you in obtaining a composite loan and meeting other government regulations, then you can always shoulder your responsibilities on Brick&Bolt. They are a pre-eminent house construction company that can take care of all your construction needs on a set budget.