“No upfront disbursal to any incomplete/under-construction/green field housing projects”. This is the instruction by RBI to Banks under its recent notification which seems to be putting an end to those so called “No EMI Till Possession” schemes offered by builders/developers.

Why did RBI take such a step all of a sudden? Well RBI justifies, this has been done looking at the higher risks associated with such lump-sum disbursal of sanctioned housing loans and customer suitability issues under those popular “innovative housing loan schemes”. Such schemes are basically designed in association with developers/builders, banks and customers as a tri-party deal where upfront disbursal of housing loans is made to builders without being linked to the various stages of construction. Under such schemes, the interest on the housing loan availed of by the individual borrower is serviced by the builder during the construction period. The risks include in such schemes are; disputes between borrowers and builders; default and delayed payment of interest/EMI by the builder on behalf of the borrower, and non-completion of the project on time. Even any delayed payments by developers/builders on behalf of individual borrowers to banks may lead to lower credit rating/scoring of such borrowers by credit information companies.

So going forward your loan disbursal will directly linked to the stages of improvements of the constructions rather making it available to those incomplete/under-construction/green field housing projects as demand raises by builders/developers.

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No EMI till Possession! Sounds enticing right? Many a time you might have come across those alluring full-page glossy ads in news paper, giant billboards on the road side for an upcoming housing project, but have you ever thought to look behind the mathematics of such offers, did you even try to figure out who benefits from these offers? Let us find out how this scheme works and what’s that hidden in it.

Such scheme starts with a tri-party agreement between builder/developer, lender (bank/lenders) and buyer of the property where the builder/developer promises to bear the Pre-EMI for some years or till possession depending upon the arrangements. Basis this lender releases upfront loan as demand raised by the builder/developer. Builder pays only the interest part of the EMI which they call it as Pre-EMI.

Who wins & who loses with such arrangement?

Builders/Developers: This helps builders/developers to use it as a marketing tool to entice prospective buyers. Even sometime these schemes are just used to fund builders/developers other projects as well which is an indirect funding by gullible buyers as lump-sum fund is received from them through bank finances. The developer utilizes these funds required for construction at an interest rate on home loan that is far cheaper than the commercial interest rate. So by paying only the interest part of a home loan the developers are able to complete the project on time and move on to a new one. This indicates a clear conflict of interest within the intention of builders/developers proposal.

Banks/Lenders: Oh Bank! Do I need to give any clarification whether a bank is a gainer or looser in such schemes? In fact the bank gets a pool of customers from a single residential project. The developer keeps referring customers in bulk and the bank approves the loans at the earliest. This also reduces bank’s expenditures on advertising and manpower for new acquisition of clients for loan. Even sometime bank may take undue advantages charging higher processing fees and a higher interest rate for these schemes which the buyer is ready to pay keeping in mind the no EMI benefits.

Buyer/Consumer: Here is the guy who has always been screwed from 360 degree angles. Whether you call it inflation, rupee depreciation or risk of losing job because client country has some blah blah issues, this hapless guy has to suffer eventually. So the name fits accurately as “END USER”! Under this so called No EMI schemes the buyer (end user :-)) is completely exposed to risk associated with it. It’s the buyer/consumer who is lent the money from the bank. The bank has no concern with EMI sharing scheme, it just finances home loan on the basis of the cost of the flat. The bank charges EMI from the buyer’s account always. What if builder delays in completing the project or after an agreed tenure builder will stop serving the interest payment to bank and the burden will come on the head of buyer. So bank doesn’t have to worry, in case of any delay in payment it simply charge penalty to buyer and in worst case it has other better alternatives, you know right! Any default in payment will obviously affects the credit score of the buyer with the rating agencies.

Barring these appending risks there are also some benefits to the buyer such as;

  1. This is a great scheme for those young professionals who are able to buy into a house and not pay the interest for few years, while they were paying the rent on their rented premises.
  2. Of course the buyer doesn’t pay for the interest of the money burrowed till such time the construction is complete as this will be serve by the builder/developer as per their promise.
  3. The buyer can take advantage of the appreciation in property value as his/her principal amount remains the same.
  4. During the period of construction, the customer is not burdened with the payment of EMIs. But again there is no guarantee that interest will be served by builder/developers in case project completion gets delayed.

Points to be noted:

  1. The developer charges a higher Base Selling Price (BSP) per square feet for such schemes. For example; if the actual price is Rs. 2,500/sqft then under No EMI schemes it will be quoted as approx Rs. 2,650-Rs. 2,700/sqft.
  2. The down payment plan of payment is costlier than the construction linked plan (CLP) which eventually increase the cost for the buyer.
  3. In No EMI schemes if the construction time delays you are bound to loose more as your EMI will start after the NO EMI period expires. In case of CLP there is security as you could actually monitor the construction and if construction is delayed you still pay back the loan.

Current slowing economy, poor salary increments, rising inflation and cost of living has put a shadow on many housing projects, as a result there is a visible slowdown in the demand than the enough supply available in the real estate industry. Many of buyers who had acquired properties some 3-4 years back are now finding it difficult to service their expensive home loans or even maintain these houses amid falling rental yields, thus they are contemplating to sell these properties to get rid of the burden. This creates more number of sellers than the number of buyers. Obviously this will lead to correction in real estate price which will eventually affect builders/developers in a big ways (of course those investors who trades in real estate properties). This is one of the reasons why such “No EMI till Possession” schemes have been promoting like anything. These builders/developers have already sensed the prospective correction in the sector and they do not want to loose their earning in future rather pick up funding in advance. My personal view is that current property prices in big cities are actually over priced where the builders/developers have already sensed it, so they are busy in designing various schemes to mitigate their losses in future.

At the same time every plans and offers have their respective benefits and limitations, so it’s upto you to do your homework first to figure out whose benefits it is and for whom these limitations are?

Link home loans to Stages of Construction! Is it a demise of (so called) “No EMI till Possession” schemes?

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