If you have invested in a real estate project, you wouldn’t want it to get delayed for obvious reasons. We found out another reason why you should run thorough checks at the time of booking a flat. If you have taken a home loan, you would end up paying a higher interest amount in a delayed project compared with a project that’s completed on time.
According to data published in June by Gurgaon-based research firm, PropEquity Analytics, it is estimated that 480,000 residential units across affordable, mid and luxury housing segments, scheduled for completion during 2011-13 will be delayed across 11 cities—Gurgaon, Noida, Greater Noida, Mumbai, Navi Mumbai, Thane, Pune, Bangalore, Chennai, Hyderabad and Kolkata.
“It’s a double blow for a first-time buyer living on rent,” said Aalok Guptaa, a New Delhi-based chartered accounted. “On one hand, he pays the rent and on the other he has to pay his instalments for an extended period of time.”
How EMIs are charged?
When you opt for a construction-linked plan (CLP), the loan is disbursed in parts at different stages of construction. For e.g., one part may be disbursed when the builder lays the foundation of the residential complex.
While you start paying your equated monthly instalments (EMIs) during the construction phase, these are only pre-EMIs and the actual EMIs start only after you get possession. The pre-EMIs charge only the interest accrued on the amount disbursed till then.
What if there is a delay?
To evaluate this, we took an example of an under-construction project, where a person has taken a CLP. We assumed that the project was delayed by eight months in between.
When the delay happens, the pre-EMI gets fixed at the last number and the cycle restarts only when the construction restarts (see table).
So if part of the loan is to be disbursed at the time of completion of interior plaster but the plastering gets delayed, the pre-EMI will remain at the level it was at the previous stage. It will go up only when the builder completes the level and gives a completion certificate. Since banks disburse the loan based on the completion certificate, you will continue to pay the pre-EMI interest based on the previous disbursed amount till the time the developer resumes construction.
“You pay the pre-EMIs for a longer period without getting the flat that you are paying for,” says Harsh Roongta, CEO, Apnapaisa.com, a loan portal.
The longer the delay, the later would the disbursement cycle start and in the interim, you would continue to pay extra interest on the amount disbursed.
What if there is a delay?
To evaluate this, we took an example of an under-construction project, where a person has taken a CLP. We assumed that the project was delayed by eight months in between.
When the delay happens, the pre-EMI gets fixed at the last number and the cycle restarts only when the construction restarts (see table).
So if part of the loan is to be disbursed at the time of completion of interior plaster but the plastering gets delayed, the pre-EMI will remain at the level it was at the previous stage. It will go up only when the builder completes the level and gives a completion certificate. Since banks disburse the loan based on the completion certificate, you will continue to pay the pre-EMI interest based on the previous disbursed amount till the time the developer resumes construction.
“You pay the pre-EMIs for a longer period without getting the flat that you are paying for,” says Harsh Roongta, CEO, Apnapaisa.com, a loan portal.
The longer the delay, the later would the disbursement cycle start and in the interim, you would continue to pay extra interest on the amount disbursed.
The additional burden
Here’s an explanation on how it actually happens
Associated costs: “There is an opportunity cost that you pay in case of a delay,” said Neeraj Gulati, director, Assotech Realty, a Ghaziabad-based real estate firm. “While on paper, your property is appreciating, you are not getting the delivery of your flat. In case you want to sell it in the resale market, you will not get the right value.”
Increased tenure: Though the actual loan tenure remains the same, the overall loan tenure increases since the tenure of the pre-EMI increases. The home loan tenure is counted only after you get the possession and the actual EMI starts.
Little compensation: While it is mandatory for builders to include a penalty clause, it doesn’t kick in immediately. Under the penalty clause, the developer is supposed to pay you a compensation in case of a delay. Along with the completion date, most developers include a grace period of three to six months. The penalty clause will get invoked only after this grace period. The rate of compensation is 5-7% per sq ft for each month of delay. On the other hand, the bank’s rate is higher at 11%.
What should you do?
Consider second-sale apartments instead of booking them in an upcoming project. Also, look for projects that have realistic delivery timelines.
Running a check on the credibility of the developer and the land acquired for the apartment complex also helps.