Interest payouts versus EMIs
With reports of both builders and bankers colluding in questionable property deals, the home loan borrower is getting jittery about investing in under-construction properties to buy his dream home.
A similar situation skewed Surbhi Shekhar’s financial plans. As her builder awaited certain legal clearances, possession of her flat in an upcoming premium apartment complex has been delayed by over 18 months. For Surbhi, who lives in a rented house, this delay has meant paying a hefty rent of around Rs 35,000 per month apart from the equated monthly instalment (EMI) of about Rs 25,000 against her bank loan.
“We opted for immediate EMI payments to cash in on the tax benefits that come with a housing loan, but that benefit has been negated with my outgoing exceeding our calculations,” says Surbhi.
Weigh your options
Banks offer up to 80 per cent of the total loan value even in under-construction properties. The loan, however, is released in tranches that coincide with the different phases of construction. The payments are done according to a schedule agreed upon by the builder, bank and the customer. For instance, if you have opted for a Rs 50-lakh property, the builder could ask for a 10 per cent payment (Rs 5 lakh) within 30 days of paying the booking amount, another 10 per cent on the initiation of the plinth, followed by more payments each time a new floor is constructed.
Union bank of India has a policy where the EMIs begin either six months after the project’s completion or one month after the builder receives his occupation certificate. Other banks also offer a moratorium period of anywhere between one year to 18 months on the EMI repayments. “Banks refrain from burdening customers with higher payouts for properties they are still to take possession of. There is an option to pay just the interest component until the EMI repayments begin,” says S Govindan, GM-personal banking, Union Bank of India.
So, say a customer has opted for a Rs 50-lakh loan for 20 years at nine per cent interest. The interest component is charged for 50 per cent of the loan disbursed, which is Rs 25 lakh. If he were to pay only the interest component, he would be paying Rs 18,750 until the bank disbursed the next tranche of the loan. Had he paid the EMI instead, he would have had to pay Rs 44,986.
This option, however, is a loaded one. While the interest component charged is for the disbursed amount alone and is lighter on the pocket, it will not reduce your total loan outstanding. If the customer opts for the immediate EMI repayment option, he can repay his loan early, but the amount of outgo is higher since it is calculated on the entire loan amount.
The customer would end up paying more if the project gets delayed at some stage. He would be expected to continue paying EMIs or the interest charges even when the bank stops making any further payments towards the loan.
According to Govindan, “With every delay, the effective loan repayment period gets shorter for the customer, who will start his EMI after the project is completed. Obviously, the interest burden would also rise.”
Damage control
Banks are open to restructuring loans and increasing the tenure in case of delayed projects. Damage control is easier for people who have just started their loans. They could cut their losses by ending the loan immediately. While doing so, customers might have to pay a prepayment penalty.
Banks prefer projects by bigger and reputed builders — which are scheduled to be completed within 12-18 months — and so should individual buyers, say bankers. “There is less risk associated with a reputed builder. His project may get delayed but it won’t be stalled indefinitely,” says an official of a public sector bank that offers housing loans.