Construction Linked Payment Plan: To Aid Home Buyers

A drive across Bangalore's outskirts and the outer ring roads, you can notice the skylines awash with the grey of cement-plastered, open-shell buildings that stand abandoned for the need for funds or, as some buyers call it, "lack of will." This financial deficiency can delay the execution of the projects and ultimately delay the project delivery.

People delay the decision to buy property because of the high costs involved. The interest rates on home loans converted to EMIs can be scary; as an alternative to overcome this unpleasant situation, developers have introduced buyers friendly scheme, the "Construction-linked payment plan" under this scheme, home buyers can avail of loans to fulfil their dream of buying a home without placing an immediate high EMI burden.

What is a Construction Linked - Payment Plan?

When you purchase an under-construction property, the entire cost of the property is not paid upfront to the developer. Under the Real Estate Regulatory Act (RERA), the developer can charge as per the completion stage of the construction. Under the "Construction-Linked Payment Plan", the bank disburses instalments to developers on your behalf as per the agreed construction milestones.

Every time the developer completes a certain slab, the bank releases part of the loan amount. The Construction-Linked Payment plan is designed so that 96% of the entire property value will be disbursed to the developers before the final slab is laid. The remaining 5% of buyers [you] are expected to pay the developer once the buyers get 100% possession of the house. The first EMI will start only after the complete control of the property.

How does a Construction-Linked Payment Plan work?

Under this arrangement, the bank disburses the house loan money as per the project's construction progress. It is crucial to remember that the bank is lending the money to the buyer and not the developer. However, the project is still on paper, yet the banks disburse the money as part payments per the project progression. This means the bank realises part of the house cost to the developer per the project completion.

Benefits of Construction-linked Payment Plans

• Reduces the risk for buyers and bankers.

• Timely and Uninterrupted money dispersal for the building project.

• Low-interest rates for builders.

• Options to book a property at lower rates for buyers.

How is the money disbursed to developers?

As a common practice, developers expect banks to make slab-wise payments of the overall property cost periodically per the project's progress. Developers raise the demand for payment of tranches as the project's construction crosses certain completion milestones.

While booking, buyers are expected to pay 5%-10% of the transaction value. A similar percentage of the property value is paid within the first three months. The Builder-Buyer agreements also specify that an additional 20% of the transaction will be released as the next payment within six months.

This implies within 12 months of booking, the developer is paid up to 40% of the house cost from the bank on your [borrower's] behalf.

Barring 5% of the property cost is disbursed only when the bare shall structure of the building is completed. The remaining 5% is paid to the developers immediately when the buyer receives the possession.

Difference Between "Subvention-Schemes" and "Construction-Linked Payment Plans" :

A massive bundle of doubts persist concerning Construction-Linked Payment Plans. Fundamentally, buyers must be aware that this loan scheme is not akin to the subvention schemes; in this scheme, the buyers pay EMI only when they possess their property. In Construction-Linked Payment Plans, the EMI starts immediately after the bank disburses a certain portion of the property value to the builder. The EMI continues to increase with the increasing disbursement of loans from the bank to the developers.

What is a Subvention-Scheme?

Developers introduced a "Subvention-Scheme" to increase property sales. In this scheme, buyers don't have to make payments until they get their house keys. An impressive plan attracted many buyers, increasing sales. This scheme was quite promising as it appeared to be; it had inherent issues.

I was considering that there was no respite to buyers from the money despite project delays.

Eventually, there was a ban on the Subvention Scheme in 2019 after the National Housing Bank's verdict to housing finance companies to stop offering loans under this scheme.

Due to the ban in the Subvention Scheme, sales volume declined, especially in the under-constructed properties, despite many repeated appeals from developers to elevator the ban, Leading to many failed attempts. However, it was a welcome move, with serious side effects, further drying up funds for project completion.

"The ban has also impacted home buyers, who were unwilling and were unable to bare the burden of paying both rent, and EMI during the construction of the house they have booked", - Says a house buyer after the ban was imposed in July 2019.

Nevertheless, the ban did come retrospectively, implying that buyers who had purchased houses under this scheme will continue to serve their payment concerning the terms and conditions in the builders-buyers agreement.

Sample of Construction Linked Payment Plan in builder-buyer agreements:

Construction Linked Payment Plan calculator, Let us assume that the value of the property is 30 lakhs

Payment -Particulars (100%)	Number of Months	Amount to be Paid	Total Payment
10% as Booking Payment	0	INR: 3lakhs	INR: 3lakhs
20% within the next 45 days of booking	1.5 months	INR: 6 lakhs	INR: 9lakhs
10% on completion of plinth/foundation	NA	INR: 3lakhs	INR: 12lakhs
10% on casting the first-floor slab	NA	INR: 3lakhs	INR: 15lakhs
10% on casting the second-floor slab	NA	INR: 3lakhs	INR: 18lakhs
10% on casting the third-floor slab	NA	INR: 3lakhs	INR: 21lakhs
10% on casting the fourth-floor slab	NA	INR: 3lakhs	INR: 24lakhs
15% on the casting of the final floor slab	NA	INR: 4.5lakhs	INR: 28.5lakhs
5% on the property possession	NA	INR: 1.5lakhs	INR: 30lakhs

Disadvantages of Construction-Linked Payment Plan:

Although the Construction-Linked Payment plan appears as a win-win to all the parties involved in the transaction, the past instances have underlined its lacunae. While collaborating with developers, banks many-a-times disburse most of the loan [cost of the house] immediately after the completion of the basic structure, within one or two years of the launch of the project, and it gives developers access to cash. However, in previous cases, many examples show how they fail to use this money to complete the project.

Why is it important for buyers to avail of Construction-Linked Payment plans?

Every builder-buyer agreement is unique and is coined with its own special set of terms and conditions that each party engaged in the contract has to honour. Although instances of the agreements being completely favourable to the developers have reduced since the introduction of the real estate law, buyers must read the fine print of the document carefully.

Various plans are being sold to buyers under the same name, and it is highly recommended to consult professional financial advisers or property advocates before they sign up for such schemes.

Ensure the agreement specifies the scheme's payment terms if the project is delayed unexpectedly. If the buyer needs to be more careful enough, they may end up paying EMI, even if the project is delayed inordinately.

FAQs,

Q. What is a Construction-Linked Payment Plan?

A. Constract-Linked Payment Plan is a scheme in which buyers, developers and Financial Institutes come to terms to turn the project into a profitable venture.

Q. What are the advantages of Construction-Linked Payment Plans?

A. Lowering risks for banks, Uninterrupted and timely financial disbursal for the developers, and Lower load interest rates for buyers.

Q. What is Subvention Scheme?

A. Subvention Scheme, introduced by the developers to help buyers easily manage their EMI. In this scheme, the buyers must start paying the house loans only after they receive the house keys from the developer.

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