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 Pvt. Ltd, 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. On the one hand, he pays the rent and on the other hand he has to pay his instalments for an extended period of time because of the delay,” says Aalok Guptaa, a New Delhi-based chartered accounted.
How EMIs are charged?
When you opt for a construction-linked plan (CLP), which is usually the case, the loan is disbursed in parts to the builder at different stages of construction. For example, 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 the possession of the house.
The pre-EMIs charge only the interest accrued on the amount disbursed till then. Also, they constitute only the interest part of the loan. The real loan repayment, including principal, starts when the entire loan amount is disbursed to the builder.
Also See | Costly Delays (PDF)
What happens in case of 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 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, chief executive officer, 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 additional interest on the amount already disbursed.
The additional burden
In our example, the pre-EMI interest that you pay at the time of casting of the 10th floor slab will continue for another eight months. The total extra cost that you incur will be over Rs2 lakh. The cost may be even higher if we factor in the associated costs.
“Clearly, this is an additional cost that you have to bear over and above your regular EMI that will begin once the full loan is disbursed,” says Pune-based financial planner, Veer Sardesai. Here’s an explanation on how it happens?
Associated costs: “There is an opportunity cost that you pay in case of a delay. 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,” says Neeraj Gulati, director, Assotech Realty Pvt. Ltd, a Ghaziabad-based real estate firm.
Increased tenor: Though the actual home loan tenor remains the same, the overall loan tenor increases since the tenor of the pre-EMI increases. The home loan tenor 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. So in the example mentioned above, the buyer will get compensation only for two to five months. Moreover, the rate of compensation is usually 5-7% per sq. ft for each month of delay. On the other hand, the bank’s rate is higher at around 11%.
What should you do?
He adds, “There is little the buyer can do. It for these reasons that we suggest the buyers should consider second-sale or fully ready apartments instead of booking them in an upcoming project,” says Sardesai.
Also, look for projects that have realistic delivery timelines. Says Guptaa, “Developers who offer realistic timelines between 18-30 months for delivery can be considered credible. In general, any project should take between two and three years to complete.”
Running a check on the credibility of the developer and the land acquired for the apartment complex also helps.
Graphic by Yogesh Kumar/ Mint