When Arun Kumar Pathak booked a flat in Noida four years ago, the builder had promised to hand over possession within 18 months. He had even offered a hefty 9% discount if Pathak paid the entire amount up front. Not convinced, Pathak opted for a smaller 2% early bird discount and paid only 30% of the price at the time of booking.
“The rest 70% is payable only when I get possession,” he says with a sense of relief. That is because the project is still not finished and there is no saying when possession will be handed over.
Pathak was lucky, but thousands of other buyers are not. Delay in projects has become a common thing across the country. The best option of buyers is to opt for a construction linked payment plan under which they pay as work on the project progresses. This way you don’t lock up your money in a project that is not moving ahead.
Pranshu Gupta opted for a construction-linked plan when he booked a 3-BHK in Gurgaon in 2013. Till date, Gupta has paid only 30% of the price of the flat. The rest will be paid in tranches of 10% when the construction reaches specific milestones.
Though construction-linked plans cushion buyers against delays, they may not fetch you the attractive discounts that cash-strapped builders are offering. Faced with a debilitating slowdown in sales, real estate developers are luring prospective buyers with innovative payment options and freebies. Each option has its pros and cons and only suits buyers in specific financial situations. best.
1. Construction-linked plan: Cushion buyers against delay in projects
This is a very common payment plan and is offered by most builders. Under this option, the first 2-3 instalments are calendar based and subsequent payments are linked to the progress in the construction of the project. You may be asked to pay 5-10% at the time of booking, another 5-10% within three months and 20% within six months.
The remaining 60-70% is paid when the construction reaches predetermined milestones. There was a time when the payments were time-based but after delays became endemic, these construction-linked plans became popular. “Initially time-linked payment plans used to be the norm. This changed to construction-linked plans due to delays faced in many projects,” says Amit Oberoi, National Director, Colliers International (India).
Construction-linked plans are good because they cushion the buyer from the delay in the project. He is not required to block a huge amount in an under-construction property. Pranshu Gupta is glad that he has paid only 30% of the price of his flat. “Construction was supposed to start from the 13th month, but two years have passed and even the digging has not started,” he says.
For Gupta, the silver lining is that he didn’t opt to pay the entire amount up front by taking a loan. The delay would have pinched him more if he was also paying a hefty EMI on the loan.
Pranshu Gupta, 42 years, Gurgaon
“Two years have passed but work is yet to start. Some buyers are contemplating legal action.”
Booked a 3-BHK flat in Gurgaon for Rs 1.3 crore in 2013
30% paid upfront and balance 70% linked to construction
Why he opted for it:
Had faith in builder because of past experience. Also got early bird and loyalty discount.
Who should go for it
Construction-linked plans suit buyers who are not in a position to make a huge financial commitment. “Go for it if you don’t have surplus cash for a large up-front payment or cannot service huge EMIs,” says a realty player. Banks usually give two kinds of loans for such payment plans. First, the loan is for the initial contributions and only pre-EMIs are charged for that amount.
The loan increases with each installments to the builder and the pre-EMI amount also goes up. In this case, the pre-EMIs keeps increasing till the final disbursement. Regular EMIs start only after the final disbursement has been made. Since the pre-EMI pain is lesser in earlier years, this will suit buyers who expect their income to rise in the next few years. They can also use the low pre-EMI period to repay personal loans they might have taken for the initial down payment.
In the second type of loan, the EMIs are based on the entire loan amount sanctioned by the bank even though only a portion of it has been disbursed. The interest component is very small in the initial years (because the disbursed amount is low), a bigger sum goes into repaying the principal. This way, the loan gets finished much earlier than the original schedule. This kind of loan also helps you to save significant amount of interest.
In the first option, the borrower pays only the pre-EMI interest in the first 21 months, which stretches a 20-year loan to 261 months. In the second option, the borrower pays a higher EMI, which reduces the loan tenure by almost four years.
How much will a Rs 1 crore house cost?
If Rs 20 lakh is paid within 6 months and the balance Rs 80 lakh is borrowed at 9.5% for 20 years, here is how much the house will cost under different plans.
2. 30:70 subvention plan – Requires a small 3 downpayment
In many ways, this is also a construction-linked plan because the buyer makes a small downpayment of 10-30% at the time of booking. The only difference is that he also takes a loan for the remaining amount, though the builder pays the EMIs till possession. The lender pays the builder construction-linked payments on behalf of the buyer. For the buyer, EMIs start either on possession or after the specific period prescribed in the agreement.
Earlier, builders were offering subvention for fixed periods. But due to delays in projects, the subvention got linked to possession. “If you are looking to buy through a subvention plan, go for possession-linked plans rather than time-linked ones,” advises Oberoi.
Such schemes may appear attractive but they are not all that great. The interest cost absorbed by the builder during the subvention period is eventually passed on to the customer by way of higher prices. The price per sq. ft under this option is higher than what you would pay under the construction linked plan. “Since the developers need to pay interest to banks, they charge customers a premium to compensate for this,” explains Ramesh Nair, COO, Business & International Director, JLL India.
Who should go for it
Just like construction-linked plans, these suit buyers who don’t have too much surplus cash. However, don’t get enticed by offers of a very small downpayment. “Schemes that require a very low up-front payment (say 5%) show the level of desperation of the builder,” warns A.S. Sivaramakrishnan, Head Residential Services, CBRE South Asia.
If construction gets stuck for any reason, there is a high chance that the builder will default on interest payment to the bank. These schemes are a good way for developers to raise money for construction. But keep in mind that the loan has been given to you, not the builder. “In the subvention plan, builder is taking loan against your balance sheet,” says Agarwala. So if there is a delay in pre-EMI interest payment by the builder, it will impact your credit score.
Kumar Pathak, 46 Years, Noida
“The builder was to give possession in 2013 but work is still going on. I saved a lot by going for this plan.”
Booked a 2-BHK flat in Noida for Rs 45 lakh in 2011
30% paid upfront, balance 70% on possession
Why he opted for it:
3. Subvention without loan: Rigorous due deligence required
This is a variation of the subvention plans, except that instead of the bank, the builder funds the purchase. While the absence of the EMI might seem like an advantage, this option also has its shortcomings. When you take a loan from a bank, it does its due diligence on the project. The buyer benefits from this research.
“Investors and buyers have to be very sure about the developer. Else, their 10-20% downpayment may get stuck,” cautions Agarwala. Pathak is happy that he opted for a subvention plan but rues the fact that he did not look into the credentials of the builder. Though he is spared the EMI burden, the up-front payment of 30% has got blocked.
Buyers also need to make sure that all approvals are in place and the work is going on smoothly. “Investors and home buyers should always check the track record of the builder and do their due diligence on the project,” says Oberoi.
Who should go for it
This option suits HNI buyers who don’t need loans. If you have cash and are ready to make a larger down payment, builders would be willing to offer higher discounts.
4. Interest waiver on home loan: Cuts EMI burden
These schemes are usually for projects that are ready for possession or nearing completion. The interest waiver could be for 1-3 years. For instance, though home loan rates are close to 9.5%, some builders have tied up with lenders to offer loans at 7.5% for three years.
Since banks can’t lend below their base rates, most of these tie-ups are with NBFCs. “Buyers must find out the interest rates applicable after the waiver period,” warns Nair. Lenders may charge a higher rate after the waiver period.
Since interest rates are expected to come down, instead of opting for such schemes, bargain with the builder to lower the price of the property.
No real gain for borrowers
Despite the interest rate cut, home loan EMIs will go down by only a marginal sum.
The Reserve Bank of India has reduced interest rates by 125 basis points in the last one year. Even though banks have not passed on the entire benefit of the rate cut to home loan borrowers, this is likely to happen in the coming months.
The RBI has also reduced the risk weight for loans with a low loan-to-value (LTV)-if a house is priced at Rs 1 crore and the loan taken by you is Rs 70 lakh, the LTV will be 70%. While the central bank has not changed the risk weight 75% for loans above Rs 75 lakh, it has brought down the risk weight for two categories of loans from 50% to 35%.
Due to this lower risk weight, banks have to provide that much less capital to small-ticket loans, releasing more capital for banks. Naturally, banks and housing finance companies are expected to pass on this additional benefit to small-ticket home loan seekers in the form of lower lending costs. Borrowers can expect another 25 bps reduction in housing loans 75 lakh, provided they are ready to make a larger up-front payment and keep the LTV less than 75%.
Even though home loan rates are expected to come down, this may not bring your dream home within reach. This is because realty prices are still quite high and a small rate cut will have only a marginal impact on the overall cost of purchase.
For example, an additional 50 basis point cut, from 9.5% to 9%, for a Rs 75 lakh home loan with a 30 year tenure, will bring down the EMI from Rs 63,064 to Rs 60,347. Though this is a welcome relief, the total cost of owning a home will go down only by 4.31%. A price correction, on the other hand, can bring down your EMIs proportionately. A 10% price correction will bring down your EMI by 10%.
5. Assured rentals: Reduces cost of borrowing
Another innovation is the assured rent offered by the builder to a buyer who makes the full payment. This rent can be for a fixed term of 2-3 years or till possession is handed over. The rent is usually 1% of the price of the property. If you buy a property worth Rs 50 lakh, the builder will give you 36 post-dated cheques of Rs 50,000 each. This means a return of 12% on the investment and might seem very attractive.
After all, you are paying only 9.5% on a housing loan. By the time you get possession in 2-3 years, the price of the property would appreciate by at least 15-20% to Rs 58-60 lakh.
The catch is that the builder has effectively taken a loan at 12% through the buyer. Cash strapped builders are finding it tough to raise funds in the present situation. Here, the liability of timely repayment rests with the buyer, not the builder. If the buyer misses an EMI, the bank will come after him. If the builder reneges on the agreement, the buyer can take him to court. That’s the theory.
The reality is that if the post-dated cheques given by the builder start bouncing, there is very little an ordinary person will be able to do to recover his dues. Dragging the matter to a court can be an expensive affair and the case could drag on for years. Builders are also notorious for keeping musclemen on their rolls.
Who should go for it
This option is useful because it takes care of the EMI for the initial 2-3 years. However, be sure about the credentials of the builder before you sign on the dotted line. Find out its track record and whether buyers in other projects have been able to encash their postdated cheques without a hitch. This little bit of research can help prevent a lot of heartburn later.
6. Freebies & discounts: Discounts work better
Whether it is a pressure cooker, a car or even a house, Indians like the freebies that come with their purchases. This is why some builders are luring them with offers of gold coins, furniture and even foreign holidays. Some developers have waived some charges, such as the floor rise charges while others are ready to pay the stamp duty, VAT and registration charges on behalf of the buyer. Be extra careful when you see such offers.
“Buyers need to read between the lines to find out if there are certain hidden terms and conditions behind the freebies offered,” says Sanjay Dutt, MD, India Cushman & Wakefield.
Who should go for it
These freebie offers and add-ons are nothing but marketing gimmicks. Buying a house is one of the biggest financial commitments you can make. Don’t let an investment of Rs 50-60 lakh be influenced by the offer of a free AC worth Rs 20,000-25,000 or a 10 gram gold coin worth Rs 26,000. “If you don’t need the freebies being offered by the developer, ask for a discount in lieu of that,” says Oberoi. Work out the actual cost of the freebie being offered and then ask the builder to give you a cash discount instead.
PS: We at PropGod have launched Sai Pratham, an affordable villa project, ideal for second/vacation home or senior citizen housing seekers in Whitefield at Bangalore.