Buying a home: How to choose between various payment options

Most builders provide one of the four options—Down-Payment Plan, Construction-Linked Plan, Flexi-Payment Plan and Time-Linked Payment Plan. Calculate the benefits that the builder gives you and weigh them against the costs/penalties that would be levied if you do not make timely payments

Buying a home is perhaps the biggest decision you take in your life. The amount involved is huge, EMIs (equated monthly instalments) take away a large chunk of your monthly salary and go on for a long time, if you take a loan. Thus, the repayment should be a well-thought out, structured plan. Since payment may be a cause of worry for many buyers and may turn them away from buying homes, builders, these days have come up with options that would encourage buyers to take loans and book properties, even before construction starts, let alone possession. When buying home, keep these payment options also in mind, other than factors such as distance from the office, amenities offered, surrounding infrastructure, built-up area, etc. While applying for a home loan, calculate the benefits that your builder gives you and weigh them against the costs/penalties that would be levied if you do not make timely payments.
 

Is a pre-approved home loan a good option?
 

When buying a home seems unaffordable because of shooting property prices combined with high interest rates, these options come in handy for you. Thus, most builders provide one of the four options—Down-Payment Plan (DPP), Construction-Linked Plan (CLP), Flexi-Payment Plan (FLP) and Time-Linked Payment Plan (TLPP). Under these options, flats are booked even before construction starts. It is a win-win situation for both the builders and the buyers, since buyers lock-in their prices much before they actually buy it, and builders get funds for construction.
 

Traditional down payment plans require you pay 10%-15% of the purchase price when you book your property, another 80%-90% within a given time-frame, say 45-60 days and the rest, at the time of possession. This remaining amount will include the balance amount of the cost of property and all charges levied by different authorities including Stamp Duty and Registration Fee, around 5% of the value of the property; the initial property tax, society maintenance charges; other charges of using society facilities such as gymnasium, swimming pool, parking, etc.
 

Risks involved in such cases include delay in construction and delivery of property that has happened in most cases, actual delivered property differing from what was shown in the sample, different constructed area, and increase in property prices by the time property is delivered to you. All these problems discourage buyers from buying property,
 

To avoid these problems, builders have come to with EMI sharing options. EMI sharing is advertised saying “no EMI till possession” but it actually works differently for loan borrowers. Under the “full sharing of EMI” option, the builder pays the interest component of your each EMI while under the “partial EMI sharing” option, the builder will pay a proportion of your EMI interest component. EMI sharing option is applicable for a certain period of time with the complete EMI to be paid by you thereafter. Some builders introduce an additional clause of paying at a fixed rate of interest, which could be challenging for floating rate borrowers.
 

Real Estate Malpractices: Home-buyer at the mercy
 

Construction-linked plans require you paying a booking amount—around 10%-12% of the purchase price upfront while the rest is linked to construction milestones, 20% with each floor constructed, for example.
 

Flexi payment option, on the other hand, is a combination of both the above options, where the buyer has to pay about one-third of the price while booking and another one-third linked to milestones, while the remaining amount would be paid at the time of possession.
 

In comparison to one another, the construction-linked payment plan is more suitable than the other two since the risk is the least, if the payment is not timed and completely linked to construction completed. Moreover, the builder would also want to complete construction fast in a bid to get cash flowing in. That said, the track record of the builder is an important parameter to be taken into consideration.
 

From the loan perspective, construction linked loans are more expensive of the two, since they have a longer tenure; only interest payment is due till the property in under construction, principal repayment starts after possession.
 

Time linked-repayment plans
 

Repayment of these loans has to be made at a pre-decided point in time and in pre-decided proportion and are therefore riskier in terms of combating delay of construction. In case you pay 10% of the total amount at the time of booking and the rest at regular intervals of say, one year each, in three equal instalments, your payments are not in tandem with the construction of the property. And according to the agreement, in case you fail to pay on time you are saddled with huge penalties that you accepted to pay it the time of signing the agreement. Home purchase agreements explicitly state, “That if the seller makes default in the performance of any of the conditions of this agreement, he shall pay Rs…… by way of compensation to the purchaser for such default; and if the purchaser makes default in the performance of any of the conditions  to be performed by him under this agreement, then the seller shall be entitled to forfeit the whole of the earnest money of Rs…….paid to him; and  that  the  party  not in  default shall be further entitled at his discretion either to annul this agreement or to specifically enforce it, in addition to any remedy that may be open to him”.
 

To take a decision in case of delay in construction, calculate how much interest costs you save on late disbursement of loan versus the penalties imposed on late payment.
 

Are the real estate markets too hot?
 

What you should look at
 

Go through the EMI sharing clause in documents to find out what is applicable to you. Pay consideration to the fact that EMI sharing means sharing only the interest amount.

For self-financed property, find out what the document holds for you. With almost all the markets, there is a difference between prices of homes when paying through different payment options. Flexi-payment option is usually cheaper so you must go through that route.
 

For homes financed through loans, you must calculate the interest cost of your loan and find out the EMI sharing options available with your builder. For homes under construction, you would pay only interest cost till construction carries on, and them start paying the principal.
 

While booking under-construction flats, research well about the track record of the builder, the timeline within which it has historically delivered, the reason for delayed delivery, if so, and the number of ongoing projects, which should not, ideally, be too high.
 

You should carefully scrutinise all charges applicable and if possible consult a lawyer for hidden charges and other anomalies, if any. And if extra charges have been altered ask the builder for a sanction letter provided by the government for all such alterations.
 

For ensuring carpet area, negotiate with the builder to add a clause of the minimum and maximum size beyond which the builder would not increase or decrease the size and ensure that the contract gets terminated if the builder crosses threshold limits.
 

Another good idea is to form a society or a group of all those buyers who booked their property with you. This gives gravity to your voice and it gets heard much more speedily than if you voice out alone. When taking possession, make sure your builder gives you the completion certificate as well, that is issued by the municipal authorities, saying that the building complies with the approved plan.

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More enquiries over credit profile post financial crisis: CIBIL

“Earlier while the banks used to give loans to entities with score of 600 out of 900 in the profile rating, now they mostly prefer a higher rating of around 800,” CIBIL managing director Arun Thukral said

New Delhi: Credit Information Bureau (CIBIL) on Wednesday said financial institutions are making more enquiries about credit profile of entities post the financial crisis, and about 20% of them are about auto loans, reports PTI.

 

“More than 20% of all enquiries made at CIBIL by credit institutions for assessing new loan applicants are for auto loans, with Delhi NCR contributing to over 34% of all auto loan enquiries (made in bigger cities),” CIBIL managing director Arun Thukral said.

 

He said after the 2008 financial crisis, banks have tightened their credit policies and have reduced their exposure specifically to unsecured debt like credit cards and personal loans.

 

The banks, Thukral said, are now more cautious in giving housing loans to customers with a lower credit rating.

 

“Earlier while the banks used to give loans to entities with score of 600 out of 900 in the CIBIL profile rating, now they are mostly preferring a higher rating of around 800,” Thukral said.

 

According to CIBIL data, the main drivers of credit growth post June quarter of 2009 has been in the secured loans segment like auto, two-wheeler and home loans.

 

The data also showed that auto loans have been on a rise in smaller cities in India over the past three years.

 

The smaller cities contribute to over 57% of all auto loan enquiries and have shown the highest growth in number of auto loan enquiries in last three years, CIBIL said.

 

It said that while overall number of auto loans disbursed is growing, the average loan size has also been on the rise since the past three years.

 

CIBIL, India's largest credit information bureau maintains credit information of more than 22 crore consumers and one lakh businesses. CIBIL score helps borrowers gauge their current financial position and improve their chances of acquiring a loan.

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Your alternatives to personal loans

Personal loans, being unsecured by nature, are priced much higher than a loan that has a security attached to it. For smaller loans, you needn’t collateralise your home or your vehicle, you can borrow against smaller market-linked securities or those having a fixed value

With consumer spending on the rise and loans being an expensive option, it is time to find other sources from where you can generate a cash flow from. Should you look at additional income by way of a part time job? That would be a little too taxing. Is it then, not better to unlock your existing assets by taking a loan against them, while preserving their value? And yes, we are not asking you to sell your assets off. Only borrowing against them as a security, instead of taking a personal loan!!
 

You can borrow against smaller securities that could range from being market-linked such as equity shares, mutual Funds, ETFs, gold deposit certificates, RBI bonds to those having a fixed value such as traditional life insurance policies, National Savings Certificates (NSC), Kisan Vikas Patra (KVP), NABARD's Bhavishya Nirman Bonds and Non Convertible Debentures.

 

Consider this: For loans against securities from Axis Bank, the interest rates would be 13% for an amount below Rs 10 lakh and 12.75% for amount above Rs 10 lakh, whereas for personal loans, it could range anything between 15% and 24%, irrespective of the amount of apply for. And if you take a personal loan from ICICI bank, it charges you anywhere between 16 to 18.5%, whereas, for Loan against security, for amount below Rs 10 lakh, interest of 13.5% would be levied and for loan from 10 to 15 lakh, 13.25% of interest rate would be levied. 
 

There is a difference in securities that banks and financing institutions would give loan against and also in the loan-to-value ratio or LTV, which is the ratio of the value of the security that will be given you as a loan. Generally the LTV is as low as 50% for market-linked securities such as equity shares and equity mutual funds, due to their volatile nature and as high as 80-90% for debt mutual funds and other debt-based investments.
 

For traditional insurance policies, the eligible amount is benchmarked against the surrender value. For example, for an LIC endowment policy, the maximum loan amount available would be 90% of the surrender value of the policy (85% in case of paid up policies) including cash value of bonus, where surrender value is 30% of the total premiums paid (for at least three years), excluding premiums for the first year and all extra premiums. This means you cannot take loans on traditional policies before you have paid premiums for at least three years.
 

For loans against fixed deposits, banks generally levy a margin over and above the rate allowed for the deposit. For example Punjab National Bank offers loans against fixed deposits at an interest rate of 2% over and above the rates offered on fixed deposits. For example if you apply for loan against a Rs50,000 fixed deposit that has three to four years remaining to maturity, you would be provided Rs40,000 as loan, 10% retained as the margin amount. Comparatively lower margins are retained for present, retired and widows of staff members.
 

Loans against KVP/NSC are provided at rates connected to the base rate by banks, for example, Allahabad bank  charges base rate+4%, effectively 14%, as of today.
 

The idea behind taking a loan against securities of smaller value springs from facts that you do not need to pledge large assets for small loan amounts and do not need to spend on their valuation and legal documentation. On the other hand, they are better then personal loans due to their inexpensive nature and speedier processing.
 

Our suggestion

Before pledging your assets for loans, think of why and for what time you invested in them. Term plans, for example, are protection products and we advise not taking loans against such products, which could harm you in case of eventuality. In case you have a cushion on insurance policies apart from the basic term plan with adequate cover, you may opt for taking loans against the other policies.
 

Other than insurance plans, check how taking a loan affects your alignment of goals that you made these investments for. An example—taking a three-month loan against an equity mutual fund you invested in for your daughter’s marriage, 18 years from now. Such loans do not erode your wealth, due to the virtue of time that you have on your side. Avoid pledging securities near maturity, or you will lose out on your objective of investment.

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COMMENTS

Rajesh Khroliya

4 years ago

i have need of 60000 rupees as a personal loan


please help me..

Rajesh 8745878332
[email protected]

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