Buying a home: How to choose between various payment options
Moneylife Digital Team 21 January 2013

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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