Rohan,30,relocated to Mumbai to explore better work opportunities a couple of years back. Since then,hes been staying in a rented accommodation and shelling out almost a third of his income every month on this. Even though he wanted to invest in a house,he was a little iffy about the financial constraints that might arise. He would have to pay rent until the property is ready for occupancy and bear the EMIs (equated monthly instalments) of the home loan.
Like Rohan,many tenants find it difficult to manage both pay the rent as well as home loan payments. In order to help individuals who plan to buy a house (fresh sale),developers and builders have introduced an innovative concept of EMI sharing to help customers find the EMI payment during the construction phase burdensome.
What is it?
EMI sharing is an arrangement whereby the home-loan borrower does not have to pay the EMI until he/she gets the occupancy. Instead,the developer building the property will pay the home loan instalment on his behalf for a stipulated period. Typically,this period is up to the possession of the property and therefore,could be between one to three years. The developer,during this period,will pay only the interest portion and not the principal amount.
Some of the builders that are currently offering this option include Emaar MGF Land,SG Estates and Ramprastha.
How does it work?
First,the homebuyer gets the loan sanctioned from the bank. Thereafter,in case of an EMI sharing option,the builder or the developer gives a post-dated cheque for the specified period of time. The borrower then needs to deposit this in his/her account. Of late,banks have started offering subvention scheme in case of selected projects. Through this scheme,banks take the EMIs directly from the builder. However,such schemes are very few in number.
Types of plans
Builders or developers can either pay off the full EMI for the specified period,which is only the interest or they could come out with a partial EMI sharing option.
*Full EMI sharing scheme: Builder will pay the entire EMI amount on your behalf for the specified period of time which is made up of only the interest element.
*Partial EMI sharing option: There is an arrangement between the home loan taker and the builder on the sharing of the EMI payment. For instance,builder may pay 50 per cent of the interest portion of your EMI and the balance will have to be paid by you.
The table This Is How It Works shows a partial EMI sharing option where the flat buyer has to pay some amount of the EMI for the first 18 months after which he/she will have to pay the entire EMI amount.
EMI sharing option can be opted with down payment,construction linked loans or flexi loans. Down payment option with EMI sharing will be the most beneficial for investors because the under construction linked loans or flexi loans payments to the builder are milestone based and the EMI is charged accordingly to the home loan taker. So the builders participation in the EMI will not result in as much saving as in case of down payment. But the big disadvantage of the down payment option is that the builder receives the entire flat cost upfront reducing your bargaining substantially if there is any problem later.
*The main advantage for a home loan taker is he is not financially strained by the EMI payments when he has to pay rentals on the house he has taken on lease. This helps him manage his cash flows better.
*The proportion of the EMI paid by the developer is a discount offered by him which will certainly reduce the cost of the flat. It is made up for in the sq ft price quoted by the builder which he would have discounted in case down payment or any other payment option. But it serves your need because you do not have to worry about EMI payments during the construction phase as you already have a committed outflow in terms of rentals.
Things you need to know
*All EMI sharing schemes are time bound – 24 months,30 months etc. So the builders obligation is restricted to the predefined deadline. In case of any delay in the project,the obligation of payment of EMI after the predefined deadline rests with the home loan taker. So it is essential for you to look for this clause in the agreement and bargain for the payment to be up to possession which means even if the project construction is delayed,you are covered.
*For the bank,you are the home loan taker and hence all payment obligations will rest on you. Your account will be debited every month expect in rare cases where banks have started the subvention scheme.
*The interest rate at which the builder will pay the EMI will be fixed at a particular rate. So if it is a floating rate loan and interest rates were to rise,the payment obligation to the extent of the rise will be borne by you. The builder will not pay for it.
Who should opt for this?
Builders or developers attractively market this scheme by calling it Zero EMI payment till possession,or low EMIs before possession. The EMI payment before possession done by the builder is taken into consideration by him while quoting the price of the flat. So do not get fooled by the marketing strategy. EMI sharing option does not provide you with additional discount and hence do not opt for this scheme for this reason. If discount is what you want then down payment mode of payment without EMI sharing will be the most beneficial because the builder will offer maximum discount as he receives the entire payment at the beginning itself.
EMI sharing scheme is best suited for those who find it difficult to manage cash flows because of dual payments of rent and EMI on the loan,before getting the possession of the property.
If you trust the builder then opt for down payment with EMI sharing to enjoy maximum cost advantage. Here since the builder receives the entire amount upfront and so you are at the mercy of the builder. If there is any issue such as delay in construction you will not have any say as the full payment to the builder has already been made. If you are not sure of the builders credentials then construction linked plan or flexi plan is the best option. Although you may not end up saving as much money,it is still a much safer option as the full payment is not made to the builder.
Buying a house is a big investment which requires sometimes more than one decade of financial commitment. So let it not be a situation where you initially save some money by way of discounts but later find yourself in a mess where your huge investment is at stake. Dont lose sight of the big picture for small gains.
The writer is chief executive officer at the BankBazaar.com