Attractive home loans: tread with caution

Developers are facilitating home loans with interest rate rebates for a limited period but buyers need to tread with caution

Only banks don’t tease customers; even builders are going all out to attract them. After the Reserve Bank of India cut policy rates last week, two developers announced that they would give home loans to their customers at 2.5 per cent and 3.5 per cent below the prevailing home loan interest rate of 10.5 per cent being offered by a number of banks. According to property experts, more such schemes are in the offing.

Mumbai-based Dosti Group has introduced a special offer on home loans at 7.99 per cent for three years for its customers. This scheme is limited to three of its properties that are nearing completion. “Buyers can get a home loan from any bank or housing finance company; Dosti will reimburse the differential interest amount directly to the customer via cheque payment each month,” said Deepak Goradia, chairman and managing director of Dosti Group.

 

Others such as Nagpur-based Luxora Infrastructure have introduced a similar scheme for its Ensaara Metropark project. The loan rate on offer for the first three years is 6.99 per cent. However, the differential amount will be paid to the bank and not the customer.

For a potential buyer, the numbers look somewhat like this. For a 15-year home loan of Rs 2 crore at the interest rate of 10.5 per cent, the equated monthly instalment (EMI) comes to around Rs 2.21 lakh. The three-year interest would be about Rs 60.2 lakh. If the loan rate becomes 7.99 per cent, the interest outgo will be Rs 45.3 lakh – a benefit of Rs 14.9 lakh or around 7.5 per cent of interest cost saving over a period of 15 years.

While these schemes look attractive, tax consultants such as Hemal Mehta, senior director at Deloitte, warn that there is no clarity on how the tax department will treat the payback amount. For example, if the developer is giving you a rebate via cheque payment, it can mean the buyer is getting a discount on the asset and could be treated as other income by the tax department.

“It all depends on the wording of the contract that the customer signs with the builder,” said Mehta. Many buyers who bought in the 20:80 schemes earlier did not realise they had to bear the interest burden in case of a delay in the project. “In the low interest rate schemes, the entire burden falls on the customer if projects are delayed. The borrower cannot even claim tax deduction on interest paid for properties under-construction until he gets the possession. This would translate into a huge cost,” said a property consultant.

Buying an under-construction property gives tremendous capital appreciation, but it is also fraught with risks. If you are looking to stay in the property, unnecessary delays will only increase the cost. For investors, though, it might make sense. Do your proper due diligence on the developer’s track record, check the approvals, and only go for properties approved by reputed banks or finance companies.