Understanding The HOME LOAN
July 14, 2016

Home Loan For Construction

Owning of a House is a Dream come true for most people. A home of ones own gives as sense of security and stability to a family. And it takes away the stress of finding rented houses and increasing monthly rents. But the downside is the un affordable real estate prices. They always seem exorbitant and manage to be way above your budget each time you think of investing in your dream.

The answer to these woes is a HOME LOAN. It is actually an easy and fairly simple method  Especially since  help you achieve you dream most Banks & NBFC’s (Non Banking financial concerns) are aggressively marketing Home Loans as a major part of their portfolio.

A Home Loan Can Be Granted For The Following Entities:

      • A previously Constructed House or a dwelling Unit
      • A Fresh Construction
      • A project under construction
      • Purchase of a Plot of Land
      • A construction Loan for constructing a House thereafter

Furthermore there are various schemes that have been launched to suit variable needs of diverse Income groups and their unique loan requirements. For your understanding of plans that are popularly available, we have described them henceforth.

The Down Payment Plan

This plan is most suitable when the Property to be purchased is “Ready to move” into or is nearing completion. In such cases, up to 80%-90% of the property value is funded by the bank. Before the bank releases funds, the buyer of the housing unit is required to pay an advance of 5% to the seller along with signing an agreement to sell between the buyer & seller. This consists of details of the transaction. The balance amount (the remaining 5% – 10%) of the cost is paid at the time of possession. This remaining amount, together with registration cost, can be additionally funded as a top up after the registration process.

The Down Payment Plan Under 80:20 /70:30 / 90:10.

With the upswing of construction in most metro cities, Lenders & Builders have come up with various innovative schemes under the Down Payment Plan. These schemes seem attractive to customers as they can book a dwelling unit under the current market prices, they can pay in Installments after possession of the property via a Home Loan.
For example in the 80:20 schemes the buyer of the pays 20% to the seller/builder & the balance 80% is funded by the Bank as a Home Loan. The Bank gives an ADF (Advance Disbursal Facility) to the Builder where in total funds are released in advance without any linkage to the construction process.

This transaction involves the signing of a tri party agreement between the builder buyer & seller. This gives an advantage to the builder as through such proxy lending, banks fund builders at much lower rates of interest. The builder also gains from the fact that paying back the Loan is entirely the responsibility of the borrower.

The RBI has frowned upon such schemes, especially taking into account that 70% of the construction projects are delayed.  Furthermore the Penalty clauses or Cancel options in the Buyer–Seller agreement between the customer & builder may not be sufficient to protect the customer, as he will be burdened with the regular EMI which he has to pay to the Bank.

THE PRE EMI SCHEME

To combat problems arising due to delays in construction, the ‘pre Emi scheme’ has been introduced. Under this scheme only the ‘interest ‘portion of the EMI is paid to the Bank till construction of the Unit is complete and possession is handed over to the buyer. Widely advertised as no EMI till possession, it works differently for Loan borrowers. As per this scheme the builder for a designated period of time will pay the complete or part of the interest portion of the EMI thereafter it will be paid by the buyer. To further attract customers, builders have come up with EMI sharing options. Downside of this plan being that the EMI will only factor the interest portion. Once the Loan amount has been disbursed, the interest portion paid already will not give any discount in the Emi schedule calculated.

CONSTRUCTION LINKED PLAN

Home Loan under this plan is directly linked to the construction process This Plan is ideal for Housing projects to be constructed by Builders or for construction of a private property, an individual house.

The Building Could Be

  • Under construction /plans have been finalized for construction.

Planning is complete but construction has yet to start. Builders after the acquisition of Land give a projected shape to the buildings & start advertising salient features. Customers can book their flats by giving a token amount of 5%.

80% to 90% of the cost of the flat is processed as a Home Loan Payments to the builder under this plan are directly linked to construction example 20% of the loan amount being disbursed on completion of each Floor.

The Final payment is made to the builder at the time of possession. This plan suits both the buyer & the builder as the builder is able to collect finance for his project & the buyer is able to get a good price. As disbursals to the builder are as per the progress of construction the builder will be keen to complete the construction on time. For construction of an individual house, An Estimate of the cost of construction needs to be submitted to get a Loan. Funds are released by the Bank as per the progress of construction.

FLEXI PAYMENT PLAN

This plan is a combination of the above plans for projects under construction. Under this plan 1/3rd of the Loan amount is disbursed to the builder at the time of booking. 1/3 rd is linked to construction milestones and the balance is paid at the time of possession.

Construction linked plans are less risky as they are connected to the progress of construction. The builder is also bound to complete construction on time, to keep the cash flow running.

TIME LINKED REPAYMENT PLANS

These plans work according to a pre decided schedule. Funds are released by the Bank as per a pre decided time & date. 10% of the value of the housing unit is paid by the buyer to the seller at the time of the agreement. Loan amount which is sanctioned by the Bank is released as per schedule. Construction delays are not accounted for, whereas in case there is a delay in payments the builder can levy heavy penalties.

PRE EMI V/S FULL EMI

If Buying a Home under construction choose a builder with a good track record of timely deliveries. Monthly Installments or EMI paid to the Bank normally factor a quotient of the Loan Principal & Interest factor. For a Home Loan projects which are under construction the customer is required to pay the only the Interest part of the Loan till the total Loan amount is disbursed possession of the property. Under this scheme the Principal part of the loan remains the same till possession. It is only after getting possession of the Unit, which the Payment of the full EMI starts as per the schedule of the Bank.

Some Banks also allow the Payment of the full EMI from the time the disbursal starts in such cases interest will be charged only on the amount disbursed the rest of the EMI will comprise of the Principal. This is advantageous as the loan gets paid off faster.

A Home Loan is a convenient way of buying a house for your loved ones but it is important that you understand all the terms & conditions prior to signing up for the Loan. Understand all the complexities of your Payment Plan, so that you can get maximum advantage.

At the time of borrowing a home loan you should remember that you can avail tax benefits until the tenure of repayment.


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