Buying a Home: Choosing between different Payment Options
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9 April 2019 - 8:00, by , in NRI, No comments

Buying a home is one of the biggest decision of any individual’s life. The amount involved is substantially big and EMIs take away a large chunk of money every month. The repayment plan must be well-thought out and structured. Builders these days have come up with various innovative payment plans to make it easier for the consumer to buy a house.

Traditional Down Payment plans require a payment of 10-15% at the time of booking the property and the balance 80-90% within a defined time frame. The remaining amount includes all the balance costs like cost of property and other charges levied by the authorities including Stamp Duty and Registration fee which is usually 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, 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 avoid these problems, builders have come up with EMI sharing options. Under the full sharing of EMI option, the builder pays the interest component of each EMI while under the partial EMI sharing option, the builder will pay a proportion of the interest component. EMI sharing option is applicable for a certain period of time with the complete EMI to be paid by the buyer thereafter. Some builders introduce an additional clause of paying at a fixed rate of interest, which could be challenging for floating rate borrowers.

Construction Linked Plans require a booking amount of about 10-12% of the purchase price upfront while the rest is linked to construction milestones.

Flexi Payment Options on the other hand combine the features of both of the above where the buyer pays about one-third of the price at the time of booking and another one third are linked to milestones and the remaining amount is paid at the time of possession.

Construction linked payment plans are preferableover the other two in terms of mitigating the risk involved. It is in the best interest of the builder as well to complete construction faster in order to get the money flowing in. However, it is essential to check the track record of the builder. From the loan perspective, construction linked loans turn out to be more expensive as they have a longer tenure. Only the interest payment is due till the property is under construction. Principal repayment starts after possession.

Time Linked Repayment Plans: The repayment of these plans have to be made at a pre-decided point and in a pre-decided proportion and therefore seem to be riskier to tackle the problem of delays in construction. The payments are not in tandem with the construction of the property. In case of failure of payment, there are huge penalties.

In order to take a decision in case of delay in construction, interest costs must be calculated to save on late disbursement of loan in comparison to the penalties imposed on late payments.

Thus it is important to analyse various payment options available to a buyer and ensure the repayment is properly structured to protect oneself from delays and losses.

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