Rohan has relocated to Mumbai and is currently living in a rented apartment. He is shelling out Rs 20,000 a month for rent. He wants 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 property is ready for occupancy and also equated monthly instalments (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, developers/builders have come out with the concept of ‘EMI sharing'.
EMI sharing is an arrangement whereby you don't have to pay the EMI as soon as the loan is sanctioned. The developer building the property will pay EMIs on your behalf up to a predefined period, which is typically the period up to the possession of the property.
This could be anywhere between a year to three years depending on what phase of construction the property is in. The developer will not pay the principal portion but only the interest portion.
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 post-dated cheque for the specified period of time, which you need to deposit in your account.
Of late, for some projects banks have started the subvention scheme where banks take the EMIs directly from the builder.
However, such schemes are very few in number.
Builders/developers can either pay the full EMI for the specified period, or they could come out with a partial EMI sharing option with you. In both cases, remember that only the interest portion is taken care of.
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 construction linked loans or flexi loans payments to the builder are milestone-based and the EMI is charged accordingly to the home loan taker.
So the builder's participation in the EMI will not result in as much saving as in case of down payment.
need to know
EMI sharing schemes are time bound e.g. 24 months, 30 months etc. So the builders' obligation is restricted to the predefined deadline.
In case of any delay in the project, the obligation of payment of EMI after the predefined deadline rests with you. So it is essential for you to look for this clause in the agreement and bargain for the payment to be up to possession, which means you are covered even if the project construction is delayed.
For the bank, you are the home loan taker and hence all payment obligations will rest on you. Your account will be debited every month expect in rare cases where banks have started the subvention scheme.
The interest rate at which the builder will pay the EMI will be fixed at a particular rate. So if it is a floating rate loan and interest rates were to rise, the payment obligation to the extent of the rise will be borne by you. The builder will not pay for it.
Suitability
Builders/developers attractively market this scheme by calling it ‘Zero EMI' payment till possession, or low EMIs before possession.
The EMI payment done by the builder is taken into consideration by him while quoting the price of the flat. So do not get fooled by the marketing strategy.
EMI sharing option does not provide you with additional discount and hence do 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 at the beginning itself.
If you trust the builder, then opt for down payment with EMI sharing to enjoy maximum cost advantage. However, since the builder receives the entire amount upfront you are at the mercy of the builder.
If there is any issue such as delay in construction you will not have any say as full payment to the builder has already been made.
If you are not sure of the builder's credentials, then construction linked plan or flexi plan is the best option. Although you may not end up saving as much money, it is still a much safer option as full payment is not made to the builder.