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Words of Wisdom : "Try to be a rainbow in someone's cloud." ~ Maya Angelou

Dark reality of home financing schemes exposed

Among the many ways to lure buyers, builders offer "seemingly" attractive financing schemes, to "dispose" off their unsold inventory of property.

Why I say 'seemingly' is because, you will always find a few devils in the fine print. Thus, I warn you... don't get dazzled by glamorous advertisements and jazzy brochures on real estate.

There are different types of such financing schemes. A few popular ones are discussed below.

A. Discounted Interest Rate Scheme
Presently, home loans are typically available in the range of 9.75% to 11%. As against this, the developers promise to arrange loans for you, that are 2-3% cheaper. Nowadays, the "7.99% home loan" is commonly being advertised.

The issue that demands your attention here is this:

The home loan tenure is normally for around 15-20 years. But this discounted interest rate would be applicable for the "first 2-3 years only". Thereafter, you will have to pay interest at the higher rates.

This has two risk elements:

One, many people fall into the psychological trap of looking at the EMI payable on the lower interest rate. But, once the rates return to normal levels, the EMIs too will shoot up. It is this higher EMI that usually becomes a burden. So, you have to be very sure that you would be able to "comfortably" service the increased EMIs, month after month, for the remaining 17-18 years.

Two, carefully check the 'higher interest rate' clause, post the discounted period. If it is the same as the normal floating rate, it is Ok. Sometimes, however, the clause may stipulate a higher margin than the normal loan. This is how the discount given earlier is recovered.

real-estate-financing-schemes
Beware of financing schemes offered by builders. They are often a scam.
B. Possession Linked Payment
Under this scheme, you may be asked to pay only 25-30% of the property value, at the time of booking. The balance 70-75% amount would be payable at the time of possession, when the property is complete. In financial terms, you couldn't ask for a better deal than this.

So where is the devil in this offer?

The devil may be the builder himself. Given the difficult times, it sounds too good to be true that the builder is both "able and willing" to take the "extra" burden of financing the project himself.

It is common knowledge that numerous projects across the country are lying incomplete. They have been so for many years now. And there is little hope that these 'dead structures' would ever get converted into 'dream homes'. Thousands of crores, belonging to lakhs of unfortunate buyers, are stuck 'forever' in such unfinished projects. Numerous court cases are pending against builders .

This financing scheme, therefore, requires extreme levels of due diligence on the developer and his past track record. You should be 200% certain that the said project will see the light of day, before you sign on the dotted line.

C. Pre-EMIs paid by the builder
This works like a normal deal, wherein you pay a certain down-payment out of your own funds and finance the balance property value through a home loan. The only difference being that till the project is complete, the builder pays the loan installments, i.e. pre-EMIs, on your behalf.

No builder will pay EMIs indefinitely. So the clause actually states that builder would make EMI payments till he gives you the possession or a specified period say 2-3 years, whichever is earlier.

Obviously, therefore, you have to check whether the project can 'really' be completed within this specified period or not. The track record in India has been that more than 95% projects get delayed beyond the promised due date. Can you bear this additional burden of EMIs, assuming that project is delayed?

Herein, again, the builder should have impeccable reputation. If the builder defaults on the loan installments, it is you who suffers. The loan is in your name. It is your responsibility to repay it in a timely manner. Any default means the bank will start its loan recovery process against you. Also, this non-payment would be reported to the credit information companies such as CIBIL, Experian, etc. Thus, your Credit Score too would suffer, even though the builder has defaulted.


As is often said... Buyer Beware! I don't think this statement would be more true anywhere else, than here.

Moreover, no builder would willingly take a hit on his profits. As such, these schemes are often offered at inflated property prices, as compared to outright purchase. So, for all practical purposes, they are a mere gimmick.

Last but not the least... (a) the sums involved are enormous and (b) payments run for many years. So, you cannot be careless with property buying and financing decisions.

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