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Composite Loan and Home Loan Balance Transfer Research Team | Posted On Wednesday, September 12,2018, 05:14 PM

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Composite Loan and Home Loan Balance Transfer



Composite loans:

Many people believe stock markets are risky, while investing in land to be safe. Investing in land requires arranging Lakhs of rupees. Investing in an apartment is a golden option. However, it is not feasible to avail two loans: One for land and the other for the constructing the building. How will you arrange EMIs for both the loans?

To solve this problem, banks are now offering a single loan to meet both needs. It’s called a Composite Loan. Though not very popular and easily accessible in our country, it might gain popularity in the coming days.

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How do Composite Loans work?

The quantum of Composite Loan varies from 70-85% of the cost of the project. Banks offer an agreed amount up front to buy a plot of land. Funds are then disbursed for construction in phases.

Construction must start within a year of availing the loan and should be completed within 2 years from the start date.


1.  The loan taken should be used for construction of a self-occupied building.

2.  The plot and construction of building should be within the municipal limits and not on agricultural land.

3.  Prepayment is allowed only up to a certain extent.

SEE ALSO: Top-up Home Loan: Eligibility, Features and Benefits

Sanctioning of the loan:

After applying for a Home Loan, the lender will:

1.  Assess your application based on the documents submitted.

2.  Verify existing residential address, place of employment, employer details and work contact numbers by sending representatives to your workplace and residence.

3.  After a thorough verification, if the lender is satisfied, they will sanction the loan.

4.  You will then receive an offer letter which has details such as Loan Amount, Loan Tenure, Terms and Conditions, Rate of Interest and so on.

5.  If you agree to the Terms and Conditions, you will have to sign a duplicate letter for lender records.

Disbursement of Home Loan:

Once the Home Loan is sanctioned:

1.  Sign the offer letter and submit it to the lender for their records.

2.  The lender will inform you of the required property documents such as Sale Deed, No Objection Certificate and so on for disbursement of the loan.

3.  The documents will be examined by a lawyer.

4.  In case all is well, the lawyer gives the thumbs up.

5.  If not, they may ask for more documents.

6.  On receiving a message that the legal verification is completed, the lender will inform you on the date and amount of down-payment or the first installment that you have to make.

7.  The sanctioned loan amount is disbursed in a single or multiple installments as per the Terms and Conditions given in the offer letter.

Fixed and fluctuating interest rate:

Interest rate is the fear factor of the loan. A major portion of the interest is recovered by the bank during the initial payments, whereas, principal is recovered later in the tenure. One of the most important decisions regarding Home Loan is deciding which type of interest you should opt for. Banks and Housing Finance Companies offer two types of interest rates, namely, Fixed interest rate and Floating interest rate.

1. Fixed interest rate:

A fixed interest rate is where the interest rate on a Home Loan remains fixed throughout the loan tenure. It is comparatively higher than floating interest rate. EMIs remain same throughout the loan tenure.

Advantages of fixed interest rate:

1.  Market conditions don’t influence interest rates.

2.  It is easy to plan other expenses as you know EMI remains the same.

3.  If interest rates are predicted to rise in the future it is better to stick with fixed interest rate.

Disadvantages of fixed interest rate:

1.  Fixed interest rate is higher by 1-2.5% vis-a-vis floating interest rates.

2.  If interest rates fall you don’t benefit.

3.  Fixed interest rate may or may not be applicable for the entire loan tenure.

4.  There is a prepayment penalty in case of fixed interest rate Home Loans.

Floating interest rate:

A Floating interest rate is based on market conditions. The change in interest rates is replicated in the Home Loan tenure. If interest rate falls, tenure of the loan decreases and vice versa.

Advantages of floating interest rate:

1.  These rates are cheaper than fixed interest rates.

2.  Floating rate keeps fluctuating. Even if interest rates rise, it could be temporary.

3.  Prepayment penalty is not charged in case of floating rate home loans.

Disadvantage of floating interest rate:

1.  Increase in interest rates could lengthen loan tenure.

Home Loan Balance Transfer:

Home loan balance transfer is also known as Home Loan Switching or Home Loan Refinancing. This is done by transferring the outstanding Home Loan balance from your existing lender or bank to a new lender or bank.

Many a time, even after a substantial repo rate cut by RBI, banks do not cut rates and still charge the higher rate. For example: Say you pay an interest of 10.50% on floating rate Home Loan. The MCLR is 10% and spread is 0.50%. Say RBI initiated a cut of 125 bps on repo rates over a couple of years. Ideally, banks should also reduce floating interest rate on Home Loans. But, they only reduced interest rates by 65 bps. In such cases, you can approach the bank and ask them to reduce the interest rate on your home loan. If they refuse, you can opt for a Home Loan Balance Transfer.

You may opt to switch your Home Loan from one bank to another in the following scenarios:

1.  If you want to gain from rate cuts and benefit from lower interest rates.

2.  If the services provided by the existing banks are not good.

Features of home loan balance transfer:

1.  A processing fee of around 1% is charged by the new bank. This rate differs across banks.

2.  Home Loan Switching has the same process as availing a new Home Loan.

3.  There is a condition on the point of time when you can refinance a Home Loan. It is predetermined and mentioned in the loan agreement.

Benefits of home loan balance transfer:

1.  You get the benefit of lower interest rates.

2.  You can choose to reduce the tenure of the Home Loan. This results in interest savings.

3.  You might get better customer service by choosing a better lender.

Costs of home loan refinancing:

1.  Exit Fee: Banks charge a penalty of 2-5% of the outstanding loan amount if you decide to refinance your Home Loan.

2.  Processing Fee: The new bank charges a processing fee which is roughly around 0.5- 1% of the principal amount.

Process of Home Loan Balance Transfer:

1.  Collect the consent letter from your existing lender.

2.  Submit the documents and the consent letter to the new lender.

3.  The new lender will pay the outstanding balance on the home loan to the old lender.

4.  Old loan account will then be closed.

5.  The property documents will be handed over to the new lender.

Home Loan Balance Transfer Eligibility criteria:

1.  You must have a clear history of a year of EMI repayments on the current Home Loan.

2.  You must have a minimum of 2 years of work experience. You must have spent the last 1 year in your current organization. If you are self-employed, you must have been in the same profession or business for the last 2 years.

3.  You must have filed ITR.

4.  Lenders may need an account of gross family income and investment documents.

5.  A clear credit history without any red flags.

6.  Minimum CIBIL score of 750 points.

What to keep in mind:

1.  Consider other costs like documentation charges and so on before refinancing.

2.  Read the fine print thoroughly.

3.  Acquire a No Objection Certificate (NOC) from the existing bank and present it to the new bank.

4.  All the procedures that you followed while applying for the existing home loan have to be followed with the new bank as well.

5.  Do a cost-benefit analysis before refinancing your Home Loan. 

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