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
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.
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.