With property developers increasingly putting cost escalation clauses in home sales agreements, buyers of under-construction properties may find themselves stuck in the interim, with the price rise for the purchase exceeding the loan taken before possession. The escalation clause is being indexed to inflation and, in turn, the cost of construction.
For instance, if you book a property worth Rs 30 lakh, you may find the price up to Rs 40-45 lakh at the time of possession. Typically, the cost of construction is 15-20 per cent of the property price in bigger cities and up to 40 per cent in smaller ones. This can easily push your cost up by 25-30 per cent, say real estate experts.
DLF, the country's largest developer, has already included an escalation clause in the agreement for its New Gurgaon projects. Many others may follow. It is not that builders do not raise prices without an escalation clause -— they can increase the carpet area of the property due to extra floor space index (FSI) and charge for it. But, this would mostly be a couple of lakhs more.
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- Cost escalation clause to push up property prices by 25-30 per cent
- Bankers says loan amount cannot be increased at the time of possession of property
- Under such circumstance, borrower may need to part-pay the enhanced amount or provide investment documents to raise the level of eligibility for a higher loan amount
- Can take a gold loan or a personal loan if the home loan-to-value is lower than the required loan amount
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Bankers aren't sure if they can do much to help you. “Once a loan has been sanctioned, it is fixed for the next 15-20 years. It cannot be raised if the builder has asked for extra money. So, raising the loan (amount) at the time of property possession is out of the question,” says M D Mallya, chairman of Bank of Baroda.
An option is simply for the buyer to save or part-pay more. That means for a property of Rs 50 lakh in Delhi, you will need to be prepared with Rs 25 lakh on you (Rs 10 lakh as margin, Rs 2.5-3 lakh for stamp duty and Rs 10-12 lakh for cost escalation). You could opt to provide more security or borrow against investments, to increase your eligibility. Banks accept life insurance/endowment policies, shares/mutual funds and the like.
However, property buyers are invariably over-leveraged; there is no scope to provide them a higher loan. In most cases, 40-45 per cent of an individual's salary is already being used to repay a home loan. A top-up loan can come to your rescue only if you've started repaying the original loan, as your repayment pattern plays an important role in granting a top-up. Importantly, both loans put together can go up to 80 per cent of the property price. An option, then, only if you borrowed less the first time.
You can take the personal loan route to pay off the extra cost. From comparison site BankBazaar.com, a Rs 10-lakh personal loan would mean an equated monthly instalment of Rs 28,212 for four years with HDFC Bank, at 15.75 per cent. But, as the income-to-loan ratio should not exceed 50 per cent, your home loan EMI should not be more than Rs 25,000 (on the higher side) to incorporate the personal loan with a salary of Rs 1 lakh. A cheaper option is a loan against gold.
Says R K Bansal, senior executive director at IDBI Bank, “Lastly, we can work with the developers and look at capping the escalation cost. It may be difficult to lend when there is no limit set.”
Bankers say they've only come across cases where developers raise rates because they provide extra FSI. And, mostly property owners bridge the fund gap. However, now banks will have to take time to understand how it works and accordingly plan the funding part.
