EMI shar­ing for those liv­ing in rented houses

While shar­ing the ini­tial bur­den with the builder might help in man­ag­ing cash flow, one must con­sider its pros and cons

HT Estates - - Property / To-let Classifieds - Adhil Shetty

Ro­han has re­lo­cated to Mum­bai on work and is cur­rently liv­ing in a rented apart­ment. He is shelling out R20,000 per month on rent. He de­cides to buy a prop­erty un­der con­struc­tion but is hes­i­tant be­cause his cash flow will get strained on ac­count of dual pay­ments — he has to pay rent till the time the prop­erty is ready for oc­cu­pancy as well as EMIs on the home loan. Like Ro­han, many oth­ers find it dif­fi­cult to man­age rent pay­outs with EMI pay­ments. In or­der to help in­di­vid­u­als fac­ing this sit­u­a­tion, the de­vel­oper/builder fra­ter­nity has come up with an in­no­va­tive con­cept of ‘EMI shar­ing’ to help cus­tomers who find the EMI pay­ment dur­ing the con­struc­tion phase bur­den­some.

What is EMI shar­ing?

EMI shar­ing is ar­range­ment whereby the bor­rower does not have to pay the EMI for the home loan as soon as the home loan is sanc­tioned. The de­vel­oper build­ing the prop­erty will pay EMIs on be­half of the al­lot­tee up to a point, which is typ­i­cally up to the pos­ses­sion of the prop­erty. This could be any­where be­tween a year and three years, de­pend­ing on which phase of con­struc­tion the prop­erty is in. The de­vel­oper will not pay the prin­ci­pal por­tion, only the in­ter­est por­tion. Some builders of­fer­ing this op­tion in­clude Emaar MGF Land ltd, SG Es­tates, and Ram­prastha De­vel­op­ers.

How does it work?

As is the nor­mal case for re­pay­ment of home loans, EMIs are de­ducted from your bank ac­count. If the EMI shar­ing op­tion has been opted for, the builder/de­vel­oper will give you a post­dated cheque. Of late and for some projects, banks have started the sub­ven­tion scheme where banks take the EMIs di­rectly from the builder. But such schemes are very few.

Types of EMI shar­ing plans

Builders/de­vel­op­ers can ei­ther pay off the full EMI for the spec­i­fied pe­riod, which is only the in­ter­est, or they could come out with a par­tial EMI shar­ing op­tion.

Full EMI shar­ing scheme: Builder will pay the en­tire EMI amount on your be­half for the spec­i­fied pe­riod of time, which is made up of only the in­ter­est el­e­ment.

Par­tial EMI shar­ing op­tion: There is an ar­range­ment be­tween the home loan taker and the builder on the shar­ing of the EMI pay­ment, e.g. the builder may pay 50% of the in­ter­est por­tion of your EMI and the bal­ance is paid by you.

For ex­am­ple, AB Builders comes out with an EMI shar­ing scheme with CD Bank. It an­nounces that EMI bur­den will be shared by the builder for the first eigh­teen months of the project. The de­tails are:

The above scheme is a par­tial EMI shar­ing op­tion where the flat buyer has to pay some amount of the EMI for the first 18 months af­ter which he/she will have to pay the en­tire EMI amount

EMI shar­ing op­tion can be opted with down pay­ment, con­struc­tion-linked loans or flexi loans. Down pay­ment op­tion with EMI shar­ing will be the most ben­e­fi­cial for in­vestors be­cause the un­der con­struc­tion linked loans or flexi loans pay­ments to the builder are mile­stone based and the EMI is charged ac­cord­ingly to the bor­rower.

So, the builder’s par­tic­i­pa­tion in the EMI will not re­sult in as much sav­ing as in case of down pay­ment. But the big dis­ad­van­tage of the down pay­ment op­tion is that the builder re­ceives the en­tire flat cost up­front re­duc­ing your bar­gain­ing power sub­stan­tially.

Ben­e­fits

The main ad­van­tage for a home loan taker is that he is not fi­nan­cially strained by EMI pay­ments when he has to pay rent. This helps him man­age his cash flow bet­ter.

The pro­por­tion of the EMI paid by the de­vel­oper is a dis­count of­fered by him that will cer­tainly re­duce the cost of the flat. It is def­i­nitely made up for in the square-foot price quoted by the builder which he would have dis­counted for down pay­ment or any other pay­ment op­tion. But it serves your need be­cause you do not have to worry about EMI pay­ments dur­ing the con­struc­tion phase.

Things you need to know

All EMI shar­ing schemes are time­bound e.g. 24 months, 30 months etc. So, the builders’ obli­ga­tion is re­stricted to the de­fined dead­line. In case of any de­lay in the project, the obli­ga­tion of pay­ment of EMI af­ter the pre­de­fined dead­line rests with the al­lot­tee/bor­rower. So, it is es­sen­tial for you to look at this clause in the agree­ment and bar­gain for the pay­ments to be made up to pos­ses­sion, when­ever it is.

For the bank, you are the bor­rower and hence all pay­ment obli­ga­tions will rest on you. Your ac­count will be deb­ited ev­ery month ex­cept in rare cases where banks have started the sub­ven­tion scheme.

The in­ter­est at which the builder will pay the EMI will be fixed at a par­tic­u­lar rate. So, if it is a float­ing in­ter­est rate loan and rates were to rise, the pay­ment obli­ga­tion to the ex­tent of the rise will be borne by you. The builder will not pay for the hiked rate.

Who should opt for this?

Builders/de­vel­op­ers at­trac­tively mar­ket this scheme by call­ing it ‘zero EMI’ pay­ment till pos­ses­sion, or low EMIs be­fore pos­ses­sion. The EMI pay­ment be­fore pos­ses­sion done by the builder is taken into con­sid­er­a­tion by him while quot­ing the price of the flat. So do not get fooled by this mar­ket­ing strat­egy. EMI shar­ing op­tion does not pro­vide you with additional dis­count and hence you should not opt for this scheme for this rea­son. If dis­count is what you want, then down pay­ment mode of pay­ment with­out EMI shar­ing will be the most ben­e­fi­cial be­cause the builder will of­fer max­i­mum dis­count as he re­ceives the en­tire pay­ment in the be­gin­ning it­self.

This scheme is best suited for those who find it dif­fi­cult to man­age cash flows be­cause of dual pay­ments of rent and EMI, be­fore get­ting pos­ses­sion of the prop­erty.

If you trust the builder, then opt for down pay­ment with EMI shar­ing to en­joy max­i­mum cost ad­van­tage. Here, since the builder re­ceives the en­tire amount up­front, you are at the mercy of the builder. If there is any is­sue, such as a de­lay in con­struc­tion, you will be pow­er­less be­cause the full pay­ment has al­ready been made to the builder. If you are not sure of the builder’s cre­den­tials, then a con­struc­tion-linked plan or flexi plan is the best op­tion. Although you may not end up sav­ing as much money, it is a much safer op­tion as the full pay­ment is not made at the out­set.

Buy­ing a house is a big in­vest­ment which re­quires some­times more than one decade of fi­nan­cial com­mit­ment. So, let it not be a sit­u­a­tion where you ini­tially save some money by way of dis­counts but later find your­self in a mess where your huge in­vest­ment is stuck or in dan­ger. Don’t lose sight of the big pic­ture for small gains.

R25,000

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