Buying A House? Choose Right Payment Plan
March 28th, 2011 by Arun
-
1 Comment
All of us cherish a dream of owning a home, which undoubtedly deserves much more than just a vigilant attention. In choosing a home, where we take important factors like property’s proximity to our workplace, offered amenities, surrounding infrastructure, build up area, allied benefits etc., into consideration; one crucial factor often goes amiss. It is ‘choosing right payment plan’, which is in line with your ability to pay and undertake risks, especially in case of under-construction properties. The degree of caution often gets aggravated, if you intend to take home loan for your dream house.In recent years, recession gave birth to a plenty of innovative payment models, namely Down-Payment Plan (DPP), Construction-Linked Plan (CLP), Flexi Payment Plan (FLP) and Term-Linked Payment Plan (TLPP). Let us discuss each of these to find out, which one suits best to your needs and requirements.Down Payment Plan (DPP)Christened as traditional plan, Down Payment Plan requires buyers to pay 10-15% of the purchase price in the form of advance booking amount (also commonly termed as `earnest money’). Thereafter, up to 80-90% of the balance amount is paid within the 45-60 days of booking. The remaining 5-10% balance amount, if any, needs to be paid at the time of possession, alongwith other charges. A hefty discount of 10-15% on the purchase price, given by developers, is a major pulling factor for buyers, which attracts them to go for DPP. The upfront payment taken by developers is generally used for construction purposes. The discount may also get higher depending on the bargaining power of the buyers. In other words, bargain as hard as you can to get the best deal out. Thus, the option happens to be the cheapest of all plans if you are planning to buy an already constructed pr
operty. In case of home loans, EMIs start once the bank makes the upfront payment.However, the risk factor involved in DPP increases with under-construction property. In case of any delay in completion and delivery of a property, which sadly is a hard reality, the buyers find themselves at the mercy of developers. In such a case, they are not even able to move out of the project due to contractual clauses. This was the case during recession, when a number of developers either stopped construction midway or slowed down due to shortage of funds and poor sales in 2008 and first half of 2009. In such a scenario, the interest has to be borne by the buyers like you and me. Considering the turmoil of real estate sector at present, this method is a risky proposition.To reduce the risk factor involved in it, an option of ‘EMI Sharing’ (also called Deferred Payment Scheme) option has come into being. This concept is popularized by marketing people as ‘No EMI Till Possession’, which works as an excellent sales pitch. The ‘Zero EMI’ or ‘No EMI Till Possession’ is where buyers are not required to pay monthly installment once the property loan has been sanctioned. Instead, the property builder will pay interest EMIs by issuing post-dated cheques for pre-decided tenure, typically ranging from 12 to 30 months. This method is lucrative as here buyers not only get a discount on the total purchase price of the house but also get time to save cash for a significant period. This is important to note here that the EMIs involved in EMI sharing method constitutes just the interest component, whereas the principal component still has to be paid by the buyers. There are 2 types of EMI sharing schemes available:•Full EMI sharing, where builder will pay the entire interest EMI amount on your behalf for a specified period of time.•Partial EMI sharing, a percentage of interest EMI has to be paid by the developer, whereas the rest of it will be paid by the buyer.For example, the builder may pay 50% of interest portion of EMI and the balance will have to be paid by you.EMI sharing scheme pertains to a pre-defined period such as 12 or 24 months by developers. This is a period for which developer pays the interest EMI and after this all EMIs have to be paid by the buyer. This means, any delay in the construction procedure may induce burden on buyers. It is advisable for buyers to look for this clause in the agreement and bargain with the developer to make him pay interest EMI till possession. In this case, you as a buyer will remain protected if project construction is delayed. Also, generally developers tend to fix an interest rate for EMIs, which they will be paying. In such a scenario, if you are going for a home loan with a floating rate and interest rates rises, the payment obligation to the extent of rise will be borne by buyers. The builder is not bound to pay for it.Post-recession, leading Developers including DLF Ltd., Unitech, Lodha Group, Ansal API, HDIL, Sobha Developers etc., have resorted to “Zero EMI Till Possession” for their new projects to revive demands in the real eastate sector.Construction-linked and Flexi Payment PlanInstead of going for a Down Payment Plan, buyers generally two options provided by builders from which choose one for buying a house. These include Construction-Linked Plan (CLP) and Flexi Payment Plan (FPP). The CLP requires buyers to pay an initial booking amount, up to 10% of purchase price, and subsequent amount in installments, which is given on completing different milestones (10% becomes payable on construction of every floor) at different stages of construction.The Flexi Payment Plan is a combination of DPP and CLP, wherein buyers are required to pay 30-40% in the form of upfront payment at the beginning and another 30-40% is milestone linked, which is paid at different stages after completing levels in construction procedure. The leftover mount in this plan is paid at the time of possession of the property. The timeline of stages of construction activities and accompanying payment schedule is laid down by developer.In terms of risk exposure, CLP scores over other payment plans significantly as it does not hold buyers liable for making payments in case of construction delay. However, before opting for a CLP, buyers should investigate the developer’s project track record, analyze construction timeline and verify that the payment of installments are not timed to make sure that you would not end up paying the full purchase price before construction is even halfway complete. In every case, payment made by installments and rate of progress of construction should go hand in hand.If the property is financed, one must calculate the amount of interest that is needed to be paid annually. In case of under-construction property, EMI will consist of only interest component, not principal. This means, more your bank pays upfront to developer, more will be interest-based EMIs. CLP is more expensive in the long run as here buyers have to pay additional EMIs to cover the interest on loan. In this case, actual EMI on principal amount starts after the possession of property.Various payment plans compared:ParametersDown-PaymentConstruction LinkedFlexi-PaymentTerm Linked#Booking Amount80-90%*5-10%30-40%Up to 10%When Construction Starts**-5-10%-Time BoundAt Various Stages of Construction-Up to 60-70%Up to 30-40%Time BoundOn Possession10-20%LeftoverLeftover10%Cost-EffectivenessCheapestSomewhat ExpensiveLess ExpensiveCheaperDegree of RiskHighLowModerateHigh* Usually 10% at the time of booking and rest within 45-60 days,** Usually 3-6 months after booking# Prices are time bound, e.g., at the end of each yearNote: Under Construction Linked & Flexi Plans usually 5-10% of Basic Consideration Price (BCP) are payable at various stages of construction. These figures are only indicative and actual rates may vary across individual projects. At various stages mentioned, there are several other charges to be paid alongwith BCP, such as maintenance security deposits, sublease deed charges, lease rent, preferred location charges, fire fighting charges, etc.Under FPP, buyer tends to get 5-6% discount instead of 10-12% as compared to Down Payment Plan. However, if you are ready to compromise on upfront discounts, you can always go for CLP method. However, under both plans (DPP and FPP), buyers will have to take the additional interest burden till possession, in case of any delay caused at the time of construction. However, this situation can be avoided by making use of the EMI sharing method. Here, interest is transferred to builders, at least partially.For example: You book an apartment worth Rs 50 lakh and opt for the Down Payment Plan, wherein the bank pays up the entire loan amount (80% or Rs 40 lakh) to the builder at the outset, whereas you are paying initial amount of Rs 10 lakh. Your EMI at 10% interest rate for 20 years comes around Rs 38,601 or Rs 4.63 lakh per year (Using HDFC EMI Calculator).Now, under EMI Sharing, if the developer promises to pay 50% of the interest on your behalf till the time of possession, you will save interest on around Rs 2.31 lakh over 2 years. At the same time, if the builder agrees to pay the full interest on EMIs, you do not have to pay anything for two years and will be able to save the entire interest on Rs 4.63 lakh.However in the same example, your savings will be reduced if you opt for construction-linked or flexi plan. Under these, bank releases loan to the builder in tranches and charges EMIs only on part amount that it has released. So, if the bank releases 30% of the loan amount (Rs 15 lakh) at the outset, your EMIs per year would be Rs 1.73 lakh or Rs 3.47 over 2 years. Obviously, interest on Rs 1.73 lakh would be lower than interest on Rs 2.31 lakh, which is there in EMI sharing.Time-linked planUnder Time-Linked Plan (TLP), buyers have to pay a certain pre-decided proportion according to a calendar that the builder decides, which is irrespective to the stage of construction. For example, here you are paying 10% as initial booking amount, 10% every quarter for next 8 quarters and rest 10% on the final possession. Once agreed, payment becomes buyer’s liability, making you vulnerable to the developer to complete the project. In such a plane, even if the project is delayed, buyers are contractually bound to pay their installments as per calendar. In case of any delay in making the payment as per the calendar, hefty penalties are imposed by the developer. These include payment of interest over and above the installment (to the developer) amount for the period of delay. In case of home loan, the liability of interest falls with buyers. In todays’ times, it’s an obsolete plan for most home buyers considering the amount of risk that is involved in it.Generally, EMI Sharing schemes are not available under this plan.The desirability of one plan over another solely varies form one situation to another, in terms of accessibility to funds, developer’s track record, etc. If you are intended to get the property financed by bank, there are chances that banks may not lend you, except in case of milestone linked payment plan (CLP). However, if you trust the developer and have enough resources to make upfront payments, you must go for the Down Payment Plan and maximize on returns depending on the discount available.Repayment Plans for old properties:The above mentioned plans are related to newly or under-constructed properties; and hence are not applicable to self-occupied or old property available in secondary market. Here are some payment options for such home buyers:Flexible Loan Installment PlanThis plan is customized repayment option, tailor-made for those whose repayment capacity is likely to fluctuate during the loan tenure. Under this, EMIs can be negotiated and structured in a way that it coincides with the income receipt. Similarly, for people nearing retirement, the loan is structured to keep higher EMIs during initial years, which subsequently decreases in latter parts, proportionate to the reduced income of the borrower.Step Up repayment plans:This plan aims at a repayment scheme linked to expected growth in income. Here, buyers can avail a larger loan with low EMIs payout in the initial period, say 3-5 years, which subsequently increases in proportion with the expected change in the future income. The plan is especially beneficial for those who have irregular income structure and cannot afford higher EMIs upfront, but has future expectations to repay the loan faster in later years. For instance, a TV soap artist is expecting his serial to end in around one-year; the bank will charge higher EMIs during that time. A noteworthy thing here is that the buyer takes higher risk, if he chooses floating rate of interest as any rise in interest rate means portion of the interest remains unrealized and is added to the principal amount.Accelerated repayment schemeIn this scheme, one can repay the home loan faster by increasing EMIs. Pre-payment of loan by larger EMIs helps in saving interest on future EMIs. Here it is important to look for the terms and conditions as interest on future EMIs gets off-set by pre-closure charges that few banks impose.Published on March 28, 2011 · Filed under: Home Loan Articles; Tagged as: down payment, home loan, Home loan plans
One Response to “Buying A House? Choose Right Payment Plan”
-
Narendera said on January 22nd, 2012 at 2:28 pm
I am planning to buy a house which is costing Rs.5293385 at flexi payment plan less registry.
the same property is costing rs. 55,65,695 at construction link plan less registry.
builder will demand Rs. 26,00,000.00 including booking amount in first two months in flexi payment plan. This amount is 59% of bsp.
in case of construction link plan the builder is going to demand 18,77,950.00 in first one months including booking amount. This amount is 39 % of bsp.
next demand in flexi pay may come for rs 5,57,428 within one/two months as the basment slab has been completed and next demand is there on construciton of basement roof slab.
next demand in construction link plan will come for rs. 3,85,221 at casting of second floor roof slab which may take approx two/three months.
in both the plan 5 % bsp and other charges are being charged at the time of possession. however in flexi plan i am paying 95% cost at 12th floor and 1,300,000 charges. In constr link plan I am paying 95% and same other charges at 18 floor construciton and there are total of 19 floors.
project is going to delay by 06 months surely however it may go more but max to 8/10 months.
please advice me what to do
Leave a Reply
|
||