Home loan guide: Opting for construction-linked plan? 5 questions to ask while availing loan
Experts say that setting up a homebuying budget can be a really difficult exercise, and one must strike a balance between being too conservative and missing out on a larger or better home, and being over-ambitious and struggling with financial obligations.
Purchasing a home is a dream that's getting harder by the day - thanks to the rising cost of property and land value across tier-1, -2, and -3 cities in India. In such a scenario, taking a home loan is one of the easiest and most efficient ways to own a property to counter the rising costs, and there are a multiple workable loan plans that homebuyers can opt for. Two of the common home loan plans are — Construction-linked payment plan (CLP), and Possession-linked payment plan (PLP). These payment options benefit both buyers and developers. Atul Monga, CEO and co-founder of Basic Home Loan, explains the salient features of the construction-linked payment plan and its pros and cons.
Difference between construction-linked and possession-linked plan
Explaining the differences between construction-linked and possession-linked plan, he informs, "In a possession-linked plan, part of the property value is paid at the time of booking, and the remaining is paid when the developer offers ownership of the unit."
On the other hand, he says, in a construction-linked payment plan, the lender doesn’t pay the entire amount to the developer in one go, but in a systematic fashion.
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While further elaborating the details of construction-linked payment plan, the CEO and co-founder of Basic Home Loan, says "Take, for instance, you want to construct a house on a land that is in your father’s name. The developer or engineer draws up a plan according to your needs and the corporation or municipality's requirements and presents you with an estimated cost of construction. Meanwhile, the lender says he can provide you with only 80 per cent of the total cost as a home loan — taking into consideration your loan eligibility and other documents — and will provide it to you in tranches. For example, when a portion of the construction is completed or a slab is laid, the lender disburses a pre-decided amount to you or the developer."
"In the beginning, the token amount is disbursed, followed by two to three calendar-based instalments; and the rest of the amount is based on the progress of the construction. In simple terms, once the initial amount is disbursed to get the ball rolling, the developer will have to start building the house in say, five stages. The lender will then keep inspecting the construction at regular intervals and accordingly approve the disbursals," he adds.
The amount that is disbursed to the developer is pre-decided between the borrower, the lender, and the builder. And generally, 95 per cent of the amount is disbursed till the completion of the project, and the rest 5 per cent on the possession of the property.
Construction-linked plan: What to watch out for?
Setting a budget
"It is important that you carefully consider your needs and the various options that are available in the market. In the eventuality of you opting for a construction-linked payment plan, the first and foremost priority is for you to set the right budget," Monga says.
Experts say that setting up a budget can be a really difficult exercise, and one must strike a balance between being too conservative and missing out on a larger or better home, and being over-ambitious and struggling with financial obligations.
Thorough research is a must
Before jumping into the construction-linked payment method, it is important to ask these questions —
1) Does the builder have a track record of finishing projects, and delivering on time?
2) Which are the other projects of the developer?
3) Have any of the developer's projects been stalled before?
4) Which are the financial institutions that offer the best rate of interest for the loan?
5) Has the regulatory paperwork been completed for the land parcel in question?
Monga says, "Additionally, at times the builder extracts 90-95 per cent of the value of the property from the lender and delays the delivery of the property for years at a time. In such cases, you not only have to wait longer for the delivery but also bear the interest burden."
The borrower should go ahead with the paperwork only after they have clear answers to these basic questions.
Tracking the economy
Bearing in mind that construction-linked plans work only when the progress of the building continues, Monga says that in case of an economic downturn, the cost of labourers and raw materials used for construction shoots up, making it difficult for the builder to get the project going. "This, in turn, takes an effect on the funding with the lender not releasing funds because the construction criteria may not have been met," he avers.
To sum up, construction-linked payment plans may seem like a win-win situation for all parties involved in the transaction, but instances in the past have revealed its flaws when certain builders and financial institutions have colluded for their own benefits. So, it is advisable that borrowers do their homework before beginning work on their dream home.
09:49 PM IST