Composite loan

I want plot plus construction loan. What should I know about this?


Here are the things you need to know about composite loans.

Loan disbursement in a composite loan happens in installments

If you are expecting that the bank would offer you a lump sum towards your home construction expenses, you may be in for a surprise. The loan disbursement in home construction loans happens only in installments.

The approved loan amount will be disbursed anywhere between 2-5 installments, depending on the progress of construction, loan size and loan to value ratio (LTV). So, borrowers will have to ensure that they have adequate funds to purchase raw materials and to start the construction work.

Disbursement is linked to construction progress

Banks have a pre-determined criterion for disbursing funds according to the progress of the construction activity. For example, if one takes up to 85% of the estimated construction cost as loan, the first disbursement will happen only after completion of foundation work, assuming that 15% of the estimate cost goes for it. The second disbursement will happen at lintel level, the third after completion of concrete works and the final when 90% of the construction activity gets over.

But if one takes only 50% of the estimated cost as loan, the first disbursement may come only after completion of lintel or when the concrete works gets over. Since the disbursal of this loan is linked to the construction activity, if the work gets suspended or delayed, further disbursements will not happen.

You will have to pay pre-EMI until final disbursal

For a home construction loan, you will have to keep paying pre-EMI every month, until the final loan amount is disbursed. This means, you will need to pay interest for the amount getting disbursed under each installment and this amount will not go into repaying the principal loan amount. If you are suspending the construction activity for some time due to any reason, you will continue paying interest to the bank, which is not beneficial in any way. Also, banks will charge you land loan rate if you don’t construct within a certain timeline. So, it is best to keep an eye on construction progress.

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BB Expert