“ChottaSa Ghar Hoga——Chhao Mein….” old melody from (Naukari 1954), silver lines the dream of every human being to own a house of his own. Though today the time and generation may have changed but what remains still common is the silver lining dream of every human being to purchase a house of his own. There are enough options for people when it comes to purchasing a house. They may either go for a resale property or a ready to move builder property or can opt for an under-construction property. Depending upon the needs, requirements and specifications one may choose among their priority for the type of home. Under construction houses these days are gaining more importance since the government launched schemes of affordable housing 2013 for the people. However, affordable houses will become more affordable if you make the right decision to choose the right lender for financing your house i.e. applying for a housing loan for under construction property.
Home loan on under-construction property
In under-construction property home loans the builder is the direct beneficiary of the home loan amount sanctioned by the lender Bank / NBFC.
It is often argued that an under construction project has enough space for appreciation in the price once the project is completed. People therefore tend to invest in an under-construction property over the intention of profitability. Additionally what blinds the buyer is the various gimmick schemes adopted by the builder, such as “Book now pay later”, “No EMI till possession”, “Book your house @ just 8% rate of interest”, etc. In financial terms these schemes are referred as subvention schemes. Under such schemes the builder or the developer of the project is liable to pay the “interest” on the principal loan amount to the lender Bank/NBFC until the property buyer receives the possession of his property. The scheme looks highly convenient for the buyers as they do not have to pay inflated EMIs on the home loan while already paying the rentals. It saves the pre-EMI interest cost of the buyer. Though the scheme looked lucrative for the property buyers it faced a major drawback as many builders failed to pay the interest to the Banks/NBFCs and therefore the subvention scheme got banned by RBI on 3rd September 2013. However later the schemes were re-launched with a slight twist of payment being linked to construction linked plans while still retaining its basic nature.
The construction linked plans (of the builder) means paying the builder at every stage of the construction. It is currently the most popular payment plan for purchasing the property. When a home loan is taken for purchasing an under construction property with construction linked plans, the buyer has to pay only the interest component to the lender Bank/NBFC on the partial disbursed amount which is referred “PRE-EMI Interest” in the loan industry. Although this EMI may reduce the buyer’s financial burden but remember any delay in construction only means paying more interest. Secondly, it may be a sigh of relief for property investors looking only for making property investment (as they are paying less EMI for under-construction property) but for those buyers who are buying the property for self-occupation, paying rent and simultaneously paying the Pre-EMI till possession, increases nothing but the cost of their property.
The most popular form of subvention schemes is 5:95, 10:90 and 20:80. However builder’s subvention schemes are mostly with those lender Banks/NBFCS that funds his project. The major benefit of this scheme is the maximum funding for the buyer, which means that the buyer as the loan applicant will get the maximum 95% loan in case of 5:95 schemes, 90% loan in 10.90 schemes and 80% loan in 20.80 schemes. At times few subvention schemes along with the benefit of maximum funding also come with the clause of minimum lock-in period.
There are namely two names that always emerge in the home loan industry when it comes to home loan on under-construction property: State Bank of India (SBI) and the Life Insurance Corporation (LIC). Both come up with tailored home loan products for under-construction houses. SBI’s RBFBG (Residential Builder Finance with Buyer Guarantee) scheme guarantees the principal refund of the loan amount to the loan borrower if a developer fails to complete the project (The scheme is currently available only in the cities of Mumbai Metropolitan Region (MMR), National Capital Region (NCR), Hyderabad, Bengaluru, Pune, Kolkata, and Chennai.) and LIC’s LICHF (LIC Housing Finance) ‘Pay When You Stay’ scheme lends only for projects which are either approved or funded by them. As per this scheme the loan borrower will not pay the principal component of the home loan to LIC up-to 48 months when he buys an under-construction house.
Piece of advice for loan seekers on under-construction property
Before applying for a home loan every buyer must factor in the cost, the quality, the location & the accessibility of the builder’s project and most importantly the builder’s reputation. The loan approval and the home loan interest rates largely depend on these factors.
- Check if the project is among the approved list of the Bank/NBFC that you wish to apply for. It helps in the faster processing of the loan process. Secondly buying a property in banks approved projects signifies that the particular project has a clear marketable title. Therefore always look for the projects which have APF from maximum banks or from the top banks.
- Make a fair deal. Negotiate with the builder because the price quoted by builders is never a final deal. There is always a room for negotiation. The more the inflated prices of the builder the higher will be the property cost which means you will be applying for a higher loan amount and land-up paying higher EMI’s on that increased loan amount. Many times builders keep increasing rates at regular intervals to show artificial and inflated appreciation even if “No Sale” is happening. Do not let this builder’s gimmick influence you, always remember it is the market forces i.e. the demand & supply decides the prices of the properties. Therefore ensure that you know the market trends in and around that area, the price quotations of the nearby projects, etc. to be not fooled by the inflated prices of the builders.
- Do not rely on the glossy brochures and the sugary words of the builder. At times the promised property at the time of booking may appear different on possession. Therefore ensure you park your money with the trustable builders. Banks have categorized builders into A, B & C. The best the builder’s category the higher are your chances for getting maximum funding, securing low interest rates & processing charges.
- At times builders may make some changes such as layout or in property space, which might not adhere legally with the approvals received for the project. Under such circumstances banks may not disburse your loan even if your loan is approved or sanctioned.
- Choose your lender wisely. With the recent failures of the few NBFCs such as DHFL, Indiabulls, etc. who were most preferred by the borrowers for higher funding paid higher home loan interest rates and apparently got stuck up later with the higher interest rates mainly because: a) under-construction projects cannot be transferred until you receive the possession of the property. Possession letter is a must for the home loan balance transfers. b) Loan Balance transfers from the failed NBFCs namely DHFL and Indiabulls are not undertaken by the rest lenders providing housing loans.
- Before you finalize any property, the following are the things you must check with the builder to avoid future confronts:
- The builder has all the necessary approvals along with the documents.
- The builder is a registered builder. Check if he is registered with the concerned authorities.
- The builder has a convenient payment plan.
- Importantly the builder has the CC i.e. commencement certificate. CC means the builder is not involved in any legal hassle and can continue with the construction work and it prevents the risks of frauds.
The lender Banks/NBFCs might not fund you if they find any deviations from approved plans, disputes between landowners and builders, disputes on the Land Title, and lack of approvals from govt. authorities, etc. It is therefore required that you hire a competent property lawyer before investing in any under construction property and seek his guidance for the property title search.
7) There is no tax benefit available for under-construction property. You can claim the income tax benefits once you get the possession of the property. The interest paid during the pre-construction phase can be availed for deduction in the five equal instalments while there is no tax benefit available on the principal repaid.
If you want to know more about home loans on under-construction property, speak to our expert on 9321020476 or visit us on https://www.loanfasttrack.com/.
Loanfasttrack is a Mumbai based loan provider company into market since 2015 offering loan services in Mumbai on– housing loan in Mumbai, mortgage loan in Mumbai, personal loan in Mumbai, business Loan, unsecured business loans, home loan transfer, top-up loans, car loans and loan transfers.
Loanfasttrack also helps you to find the best bank for home loan, to get you an instant loan in Mumbai, instant personal loan in Mumbai & business loan in Mumbai, to get you the lowest home loan rates in Mumbai, makes you qualify for the maximum loan against property eligibility & assured low interest rates for loan against property in Mumbai and to get you a low cost home loan balance transfer.
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