Buying a home is a lengthy procedure and it takes several years for this dream to come true for many people. It can be a little bit challenging as well from finding the right builder to applying for a home loan.
You can also apply for a plot loan where you can purchase a plot and take your time to build a house on that. On the other hand, there is a composite loan, which enables you to quickly acquire the house of your dreams. This article lays down composite and plot loans in detail.
Have a quick go-through and make up your mind about the one best fitting your requirements.
What is a Plot Loan?
You can get a plot or land loan from lenders. These lenders can be banks or housing finance companies. A plot loan and a housing loan have similarity but vary in their purpose, which can be deduced from the terms themselves. You can take a home loan to purchase a readymade house, apartment, villa, etc. But with a plot loan, you can only purchase a plot or land.
What is a Composite Loan?
A composite loan, which also goes by a composite home loan, allows you to invest in residential land and build a house within a specified period. This type of loan merges a housing loan and a land loan; hence the term “composite loan”.
You should only apply for this loan if you plan to start construction as soon as you buy land. If you have no such plan or want to start construction after quite some years, a plot loan will be ideal for you.
Composite Loan vs. Plot Loan
Refer to the following table for a clarified understanding of the differences between the two types of loans:
| Composite Loan | Plot/ Land Loan |
| Interest rates vary between 7.25% and 10.05%. | Interest rates vary between 7.7% and 13%. |
| You can claim a tax benefit on the principal amount of up to Rs. 1.5 Lakhs and interest payment of up to Rs. 2 Lakhs. | There is no such tax benefit available for long-term investments in land loans. |
| You can repay the loan for a maximum of 30 years. | The maximum repayment period is 20 years. |
| According to the RBI, composite loans are exempt from all prepayment and foreclosure fees. You must carefully read your loan documents in order to comprehend the clauses regulating prepayment and foreclosure charges for your composite loan. | Foreclosure fees for land/plot loans vary depending on the bank or financial institution, but they usually range from 2% to 5%, plus any applicable taxes. |
| The LTV ratio for a composite credit may rise to 80%. | The LTV ratio for loans for land or plots is approximately 70%. |
| A composite loan is a bank credit that pays for both the plot’s cost and the anticipated cost of constructing a home. Hence, it combines a home loan and a plot loan. | You can only use a plot/land loan to purchase a residential plot. |
Eligibility Criteria for Composite Loan/ Plot Loan
If you want to apply for a plot or composite loan, make sure to check the eligibility requirements thoroughly to prevent having your loan application denied. You must meet the following criteria in order to qualify for both land/plot loans and composite loans:
- Age limits: 18 to 70 years
- Salaried or self-employed employed people can apply
- Both resident Indians and NRIs are eligible to file for composite loans and land/plot loans.
When evaluating an applicant’s eligibility for a plot loan, specific lenders may also consider the applicant’s income, possessions, obligations, firm continuity (for business owners), and employment experience (for salaried individuals).
Comparing Documentation Criteria for Composite Loan & Plot Loan
This section illustrates the documents required for composite and plot loans, separately:
Documents needed to apply for plot loan:
- Filled out and signed application form
- Income proof
- Address proof
- Age proof
- Documents regarding the plot
- Approved drawings and layouts of the plot
- Proof of employment/ business
Documents to apply for a composite loan:
- ID proof
- Residency proof
- Proof of income
- Properly filled and signed loan application form
Things to Remember while Applying for a Composite Loan
You should keep the following pointers in mind while applying for a composite loan for a smooth application-to-approval procedure:
- You won’t receive the complete loan amount in one instalment if you apply for a composite loan. Usually, the financier distributes it in three stages.
- First stage: Buying the land
- Second stage: The start of the construction procedure
- Third stage: When work begins, it will be made accessible in stages.
- A composite home loan needs you to construct a house on the property you purchased within a certain time frame.
- Alongside your construction ideas, you must provide a cost breakdown to the financing organisation or bank. This will make calculating the interest rate and disbursement amount for your composite loan easier.
- Most financial institutions, as part of their composite financing strategy, anticipate that you will begin construction on the home within 1-2 years. If you don’t do this, the lender has the right to raise your composite loan interest rates or require that you finish the repayment and terminate the loan.
Either you take out a home loan or a land loan, you have the goal of building your dream house. Taking out two different loans can put separate sets of responsibilities on you. A composite loan can ease the process by combining the two types of loans. But it has a set of criteria. Hence, it is advisable that you weigh the pros and cons before applying for either of them.
