Advertisement has come to stay for anything and everything in the world. Flat sale Advertisement further seems to have the final say over anything. In fact, advertisements related to buying of gold on akshaya thrithiyi is about maximum 20 years old. The extrapolation of the same is for purchase of flat on the same auspicious day of akshaya thrithiyi – probably since this year onwards!
Innovation in Realty Business:
Realtors have been introducing new practices to change the mind-set of the buyers. Normally, it would be enough to have a few thousands of rupees to go in for gold purchase. People will definitely hesitate to invest in housing because the investment is rather on the higher side. Realtors have since introduced an innovative plan which states that the buyer needs to pay 5% only or roughly Rs.10,000 as initial amount and the balance can be paid by them to the Realtor at the time of collecting the key. This kind of advertisement does tempt the buyers impulsively.
Our exercise is to find out whether the new scheme mooted out by the Realtors is beneficial to the buyers. According to the scheme, the buyers are required to pay 20% of the total cost as advance and the balance 80% will be given by the bank as loan for which the interest will be paid to the bank by the Realtors until handing over of the possession.
This 20:80 formula has started appearing in different avatars such as 25:75, 2:92:6, 6:88:6, 10:10:70:10 etc. While the banks will sanction loans based on higher rate of interest favourable to them, the buyers will have to shell out money from their pockets at different intervals.
Realtors get the benefit of loans with less rate of interest:
In the agreement it will be mentioned that the Realtors will pay the interest to the bank for 2 to 3 years during the construction period. The buyers will have to make the down payment, registration fee, VAT, Service Tax etc..
For example, in the case of 5:80:15 formula, the buyer will have to make 5% of the cost of the flat to the builder as advance; 80% will be through the bank as loan and the balance 15% will be paid by the buyer to the builder at the final stage. In the process, whether the buyer gets any concession or not, the builder gets huge benefit in terms of loan towards cost of construction at the rate of just about 9% rate of interest from the bank through the buyers.
Otherwise, the builders will be required to source this kind of loan facility for not less than at 18-20% apart from mortgaging their property.
Ramesh Nair, CEO and Country Head, JLL, advises that the agreement must be entered into between the builder and the buyer and the property must be made out in the name of the buyer. He further opines that some of the promoters follow this method to raise capital for their business.
It is advisable to verify the rate of interest applicable for the home loan. Sometimes, it will be less during the time of construction and will be more once the possession is handed over to the buyer. For instance, it is likely to be just 7.99% during the construction phase and will be 10.5% after 2 or 3 years as the case may be. Hence it is imperative that this fact must be checked out in the beginning itself.
In the case of flats with several floors, it is essential to check whether necessary approval has been obtained from the concerned departments; otherwise, it is bound to take more time for completion of the project.
Analyse the cost:-
Similarly, one must look at the cost per sq.ft.since the cost per sq.ft.under this scheme may sometimes be more. For example, if the normal sq.ft.rate is Rs.4,700 for a flat, it is likely to be Rs.4,900 per sq.ft.under this project wherein the builder will be in a position to compensate and regain the interest paid by him to the bank.
Basically, there are some advantages such as low down payment, construction phase, no necessity to pay interest for 2-3 years etc. At the same time, if the period of construction is extended, the affected party may be the buyer since the loan has been taken out only in his name. Hence it is better to include a provision in the agreement that it is the responsibility of the builder to pay the interest to the bank until completion of the project and physical handing over of the property.
Income-tax Exemption Procedure:-
In order to avail of IT full exemption of interest paid during the construction phase, the buyer should necessarily occupy the house upon project completion within three years from the commencement of construction. Accordingly, up to Rs.2 Lakh towards interest paid to the bank can be availed of as IT exemption spread equally to 5 years from the financial year of completion of the project.
In case the project is not completed within 3 years, IT allows Rs.30,000 only as IT exemption towards interest paid to the bank. Similarly, in case there is any default or delay in the payment of pre-EMI on the part of the buyer, there is every possibility that his name will get reflected in the CIBIL report.
Ramesh Nair, therefore, conclusively states that in the event of the buyer having 20% payment readily available on hand, it is certainly beneficial for him to buy and occupy the house by availing of such loan facility offered by bank. Hence, it is necessary for the buyer to consider all related provisions instead of falling a prey to these manipulative advertisements.
- Ramesh Nair, CEO and Country Head, JLL
(This article originally appeared in Nanayam Vikatan earlier and now reproduced and updated by P S Ramamurthy)