Alluring payment plans are driving housing demand; but there is more to this than meets the eye

Almost every developer in Mumbai is offering payment plans that say “Pay 5 percent now. And rest on possession.” These sorts of payment plans are the biggest reason for housing sales to show traction in the last three months for under-construction projects. It sounds easy, attractive and enticing. But it's important to fully understand the nature of these plans before embarking on the journey.

Pay 5 percent now. Rest on possession 

The first thing to be clear on this punch line is that in a dominant majority of the cases – this does not technically mean “Pay 5 percent now. Rest on possession.” In between these two steps – is a critical component. That component is: Taking a home loan. This home loan, however, will have one different aspect to it – a tripartite agreement between the buyer, lender and also the developer. The key element is that on this home loan, the pre-EMI will be serviced by the developer until a particular date or event.

These schemes are very useful for the entire housing industry. An individual or family looking to buy a home is in most likelihood staying on rent currently. In case if this facility is not available and a prospect goes to buy an under-construction apartment via a home loan, he will need to pay rent to the landlord plus interest to the lender at the same time. That stretches finances. In this pre-EMI facility, the home buyer does not need to worry about the interest expense until a particular date.

In exchange for providing this facility to the customer – the developer charges an additional cost to the home buyer. And they will be explicit about it. Example: A developer will tell a prospective home buyer that “price under pre-EMI benefit plan is Rs 1.2 crore. But under the plain-vanilla plan it is Rs 1.1 crore.” That differential of Rs 10 lakh is the cost of the facility wherein the developer will be bearing the interest expense on behalf of the buyer.

Be careful about two things  

1) There are duration linked pre-EMI schemes and event-linked pre-EMI schemes. Duration linked pre-EMI schemes will offer deals like ‘Pre-EMI benefits for 24 months or 30 months.' Personally, I will be cautious on these schemes as there is a possibility that projects get delayed. Hence a scenario may emerge wherein even after 30 months – the project is not yet complete and the developer will stop his pre-EMI payment. The preferable way is to opt for projects that have a pre-EMI payment that is until possession. Hence if the possession is delayed, it is still the responsibility of the developer to continue servicing it. Insist on that in writing with the developer as in the tripartite agreement there will only be a date mentioned until which the scheme lasts.

2) While the developer is bearing the pre-EMI, the loan still rests on the home buyer. Hence if a default by a developer occurs, it is the responsibility of the buyer to continue servicing the pre-EMI. These clauses are mentioned in the tripartite agreements between the developer, lender and buyer. Hence be careful about the developer you choose. There are already cases where the developer has defaulted on his commitment and the home buyer is being chased by the lender. A home buyer then is trapped in a lethal cocktail of a stuck under-construction home, a pre-EMI payment as well as a rent expense.

Process has been refined

Mercifully, these schemes have been refined over the years. Earlier it was a brazen and reckless scandal wherein the bank would disburse a big chunk upfront to the developer which would often get siphoned or diverted elsewhere. Now any disbursement is construction-linked with the support of an architecture certificate requirement. Hence any disbursement is progress-linked to the project. The moment progress stops on the project – the disbursement stops.

Additionally, a lender will deduct the interest component and then disburse the amount to the developer. So, if the demand letter is raised for Rs 8 lakh, the disbursement to the developer will be for a lower amount due to this deduction. Hence interest default on a disbursal is not a possibility today. The situation gets messy when the duration of the tripartite agreement ends – and the project is not ready. Then a process of a developer paying EMI to the buyer and thereafter the buyer paying the bank may arise. There is even a likelihood of a developer urging the buyer to service the pre-EMI and then claim reimbursement from the developer – this is a dangerous signal in my view.

So yes, these payment schemes look attractive and are enticing. The process has improved. But eyes need to yet be wide open while opting for it.

(When not busy with his newstoon platform Snapnews, Vishal Bhargava is a real estate enthusiast who views and reviews new projects. The views are personal.)