Owning a residence is a goal many of us live with. However not all of us understand the simple ways in which we can finance our property purchase. The knowledge of various methods of financing can go a long way in planning for a home purchase. Nearly 85% of Indian real estate market comprises of the residential segment and rest is commercial or retail, and increasingly much of it is financed through mortgages. Thereby we list down different financing options a buyer has for owning their dream homes –
Down payment plan
This is a plain off the shelf purchase sort of plan. A buyer has to pay say 10% of the cost of the house as a booking measure. Another 80-85% (only for purposes of illustration) of the money has to be paid within a stipulated time from the booking (say 45 days). The residual amount can be paid off at the time of handover of the unit. The property developer may extend attractive discounts under such a plan since a customer pays nearly all the money upfront.
A buyer may be at a higher risk under this plan as he ends up locking his/ her savings regardless of the time taken to complete project or construction progress.
This helps the builder as larger amount is available with builder for the construction purpose. Moreover, it helps the buyer too in a way. Discounts are also made available by builders to buyers paying money through down payment. In other plans, EMI is deferred which results in loss for buyers, as interest rates can move in either directions the final purchase price of a buyer can vary. Therefore, down payment helps buyers save money.
Given the nature of this plan it is important that a customer does a thorough diligence on the builder before going ahead with the down payment plan.
Construction linked payment plan (CLP)
In CLP, the construction stage of a project determines the amount a buyer owes to a property developer. To start with he has to pay a booking sum of 10-12% (for purpose of illustration only) of the price tag upfront or amount of construction at that time. The rest of the money is linked to progress in construction. It is normally linked with every alternate floor developed.
The buyer is assured that all of his money is not trapped at once. In case the property purchase is made through a mortgage the buyer is supposed to pay pre-EMI to the bank till construction is complete. One may not get discounts similar to purchases under Down Payment Plans.
Time linked payment plan (TLRP)
In TLRP, the buyer is supposed to pay for his purchase at pre-determined points of time and in pre-decided proportions. However, your payments may or may not be in sync with progress in construction. This can put one at risk of construction delays.
Subvention is another way of sharing the burden of cost of construction. In this process, there are three parties to be considered ¬– banker, buyer and the property development company. The buyer books the property by paying 5-30% (for purposes of illustration only) of the money upfront to the developer. The rest is released by the bank directly to the developer as per pre agreed terms typically in line with the construction progress. Please note that the developer bears the entire interest cost or as per a formula either for a stipulated time period or till the offer of possession. These terms are agreed upon through a tri partite agreement.
A close look at the terms would make one understand that Subvention Plan is nothing but a price discount that is realised over a period of time. Moreover, it is likely that the developer also completes the work on time as the firm will want to offer possession to relieve itself of burden of interest.
The risk one carries in such a scheme is that while the loan is obtained on credit history of a buyer the development company gets to access it at easier terms relative to its own credit score.
0% down-payment and assured buyback
A lot of attractive plans keep floating in the market. One plan assures buyers of 0% down-payment. As a buyer, you don’t need to pay any money, but 5% stamp duty along with 1% VAT and registration charges. Some builders also offer assured buyback plans, wherein they propose that buyers purchase a property and the builders will repurchase the property at 30-35% higher price within 18-36 months from completion of projects. This helps the builders to raise capital in a slow market. However, there is no regulator for such schemes and your money will remain blocked until completion of project, which raises your stakes.
0% down-payment is a very specific plan tailor made by only a handful of lenders.
Relief to first-time buyers
In Budget 2016, the government has promised first-time home buyers an additional deduction of INR 50,000 on interest for loan upto INR 35,00,000/-.
Other subvention plans
20:80 scheme is also there in the market, in which the builder gets 20% of the money from buyers and 80% from banks. Once buyers take possession, then they pay the interest. Because the interest rate charged is generally higher than market rate, buyers end up paying more than necessary. However, because it puts at risk the money of bank, RBI has raised concerns regarding this scheme.
Some banks also don’t charge any penalty on unplanned or early repayment of money. Apart from 20:80 scheme, CLPs and Possession Linked Plans (PLP) are available in various combination of ratios, like 30:40:30, 5:85:10, 10:70:10:10 etc.
Each plan comes with its own risks and benefits. Check which one suits for you before buying property. VTP Realty is a Pune-based leading developer of real estate which is creating a niche for itself as a customer centric firm. We are happy to engage with our clients and prospects on financing options for VTP Properties.
- By Ruchi Adlakha