Home buying: How to pick the best payment plan

Faced with a slowdown in sales, real estate developers are luring prospective buyers with innovative payment options and freebies. We examine the arithmetic behind each and tell you which suits you best.

When Arun Kumar Pathak booked a flat in Noida four years ago, the builder promised possession in 18 months. He offered a 9% discount if Pathak paid the entire amount up front. Pathak opted for a smaller 2% discount and paid 30% of the price. “The rest is payable when I get possession,” he says. The project is still not finished and there is no sign of getting possession. Not everyone is as lucky. Housing project delays are common. Faced with a slowdown in sales, real estate developers are luring prospective buyers with innovative payment options and freebies. We examine the arithmetic behind each and tell you which suits you best.

Construction-linked plan

In this option, the first 2-3 instalments are calendar based and subsequent payments are linked to progress in construction. You may pay 5-10% at the time of booking, another 5-10% within three months and 20% in six months. The remaining 60-70% is paid when the construction reaches predetermined milestones. 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. The rest will be paid in tranches of 10% when the construction reaches specific milestones. “Construction was supposed to start from the 13th month, but two years on, even the digging has not started,” he says. 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.

Who should go for it

Construction-linked plans suit buyers who are not in a position to make a huge financial commitment. Banks usually give two kinds of loans for such plans. First, the loan is for the initial contributions and only pre-EMIs are charged. The loan increases with each instalment to the builder and the pre-EMI amount goes up. Regular EMIs start only after the final disbursement has been made. Since the pre-EMI pain is lesser in earlier years, this suits buyers who expect their income to rise in the next few years. They can also use the pre-EMI period to repay loans taken for the downpayment. In the second type, EMIs are based on the entire loan amount sanctioned even though only a portion is disbursed. The interest is very small in initial years and a bigger sum goes into repaying the principal.

30:70 Subvention plan

Much like a construction-linked plan because the buyer makes a small downpayment of 10-30% at the time of booking. The 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 a specific period. Such schemes are not all that great. The interest cost absorbed by the builder during the subvention period is 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 construction linked plan.

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 small downpayment. If construction gets stuck, there is a high chance that the builder will default on interest payment to the bank.

Subvention without loan

Here, instead of the bank, the builder funds the purchase. While the absence of the EMI might seem like an advantage, this option has its shortcomings. When you take a loan from a bank, it does its due diligence. The buyer benefits from this research. Buyers also need to make sure that all approvals are in place and work is going on smoothly.

Who should go for it

This suits HNI buyers who don’t need loans. If you have cash and can make a larger downpayment, builders would be willing to offer higher discounts.

Interest waiver on home loan

These schemes are for projects that are ready for possession or nearing completion. The 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. Most of the tie-ups are with NBFCs.

Who should go for it

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.

Assured rentals

Another innovation is the assured rent offered by builders to a buyer who makes the full payment. This can be for a fixed term of 2-3 years or till possession. The rent is usually 1% of the price of the property. If you buy a property worth `50 lakh, the builder will give you 36 post-dated cheques of `50,000 each. This means a return of 12% on investment. After all, you are paying 9.5% on a housing loan. By the time you get possession, the price of the property would appreciate by at least 15-20% to `58-60 lakh. The catch is the builder has effectively taken a loan at 12% through the buyer. 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. The reality is that if the cheques bouncing, there is littleyou can to do to recover dues.

Who should go for it

This option is useful because it takes care of the EMI for 2-3 years. However, be sure about the builder’s credentials before you sign on the dotted line.

Freebies & discounts

Indians like the freebies that come with purchases. This is why some builders are luring them with gold coins, furniture and even foreign holidays. Be extra careful when you see such offers.

Who should go for it

These freebie offers and add-ons are marketing gimmicks. Don’t let an investment of 50-60 lakh be influenced by the offer of a free AC worth 20,000

HomeShikari’s View – by P.Sunder, CEO

There are no dearth of inventive schemes to push home sales in a sluggish market. But the old adage of ?buyer beware? always holds good in a place like India. Don?t get taken in by fancy schemes of a luxury car or a foreign holiday offers. They all come only at your expense and there is no such thing as a free meal. The important thing is such high value purchases such as property is to look at your fund flows and plan your investment, while minimising risk. One other way to eliminate risk to a large extent is to buy properties that are nearing completion or have just been completed. The price may be a little more than a launch offer (given market conditions being not so conducive for huge gains) but you are getting a guarantee of a home that is finished.

Courtesy:Narendra Nathan, TNN, 02 November 2015

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2 thoughts on “Home buying: How to pick the best payment plan”

  1. If a Builder assures Handing over by a certain month in a particular Year and overshoots the period under one excuse or the other, by what ever duration, what is the buyers recourse? Suppose, te builder puts forth the excuse of Govt Dept. delays in Occupancy certificate clearances etc.,etc.

    1. Hi Mani\n\nYou need to review your sale agreement and see the clauses. That will determine how it will be handled. If there is a clause for penalty, then they will have to adhere to it, if there is no penalty then the only recourse is to go to the consumer court and file a case. If the penalty is one sided (that any delay from your side has a huge penalty, but any delay from their side has a very insignificant penalty) then also you can approach the consumer court. Consult a competent lawyer if you need to.

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