While choosing a home, people keep in consideration many important factors like property's proximity to workplace, offered amenities, surrounding infrastructure, build up area, linked benefits etc. But often, one crucial factor goes amiss i.e. choosing right payment plan.
As we know, every individual buying a home has different financial backgrounds and different financial requirements. So, housing finance companies and banks offer various repayment options that suits buyer's need.
Usually, the repayment options are tailored according to a borrower's credit worthiness. They are designed to simultaneously benefit both the borrower and the lender. Lenders consider factors like monthly income, stability of employment, age of the customer and any other debts that are being serviced by him while deciding on which repayment plan to offer to a customer.
On the other hand, while choosing a repayment option, a borrower should keep in mind that the chosen scheme is affordable, increases his repayment capacity and gives him tax benefits. The main aim behind choosing a suitable repayment option is to make repayment of home loans easier. Before selecting a repayment scheme borrower should take some time to understand its features as it is a long term financial decision.
There are some innovative payment models, namely Down-Payment Plan (DPP), Construction-Linked Plan (CLP), Flexi Payment Plan (FLP) and Term-Linked Payment Plan (TLPP). Let us discuss these to find out, which one suits best to the needs and requirements of the borrowers:
Down Payment Plan (DPP)
A traditional, Down Payment Plan requires buyers to pay 10-15% of the purchase price in the form of advance booking amount (also commonly termed as `earnest money'). Thereafter, up to 80-90% of the balance amount is paid within the 45-60 days of booking. The remaining 5-10% balance amount, if any, needs to be paid at the time of possession, along with other charges. A hefty discount of 10-15% on the purchase price, given by builders, is a major pulling factor for buyers, which attracts them to go for DPP. The upfront payment taken by builders is generally used for construction purposes. The discount may also get higher depending on the bargaining power of the buyers. In other words, bargain as hard as one can to get the best deal out. Thus, the option happens to be the cheapest of all plans if one is planning to buy an already constructed property. In case of home loans, EMIs start once the bank makes the upfront payment.
However, the risk factor involved in DPP increases with under-construction property. In case of any delay in completion and delivery of a property, which sadly is a reality, the buyers find themselves at the mercy of builders. In such a case, they are not even able to move out of the project due to contractual clauses.
To reduce the risk factor involved in it, an option of ‘EMI sharing' (also called Deferred Payment Scheme) has been introduced. This concept is popularized by marketing people as ‘No EMI Till Possession', which works as an excellent sales pitch. The ‘Zero EMI' or ‘No EMI Till Possession' is where buyers are not required to pay monthly installment once the property loan has been sanctioned. Instead, the property builder will pay interest EMIs by issuing post-dated cheques for pre-decided tenure, ranging from 12 to 30 months. This method is lucrative as here buyers not only get a discount on the total purchase price of the house but also get time to save cash for a significant period. This is important to note here that the EMIs involved in EMI sharing method constitutes just the interest component, whereas the principal component still has to be paid by the buyers.