If you have a home loan and are paying pre-EMIs, the total interest cost on your loan will go up
The monthly rent you may be paying will add to your loss
Considering the lockdown and the exodus of labourers, the ministry of housing and urban affairs has advised state governments and respective real estate regulatory authorities to consider covid-19 pandemic as “force majeure" event and allow extension of up to nine months to developers for the completion of real estate projects. This is a relief for developers, but it will cost homebuyers dear.
Finance minister Nirmala Sitharaman stated in a press conference on 13 May stated that authorities should “extend the registration and completion date suo moto by six months for all registered projects expiring on or after 25 March 2020 without individual applications. Regulatory authorities may extend this for another period of up to three months, if needed."
According to the Real Estate (Regulation and Development) Act, 2016, the registration granted for a project can be extended by a year due to force majeure, which includes war, flood, drought, fire, cyclone, earthquake or any other calamity caused by nature affecting the regular development of a real estate project.
The immediate impact on existing buyers of an under-construction project will be delay in getting possession. For a lot of you, this may mean paying rent for the house you are living in currently, besides paying the equated monthly instalment (EMI) in case you took a home loan.
Typically, in case of under-construction property, a bank disburses the loan amount in tranches to the builder, according to the construction status. However, homebuyers are expected to keep paying pre-EMIs from the time when the loan gets disbursed till they get possession. Pre-EMIs, typically, consist only the interest part of the loan, and the full EMIs start once homebuyers get the possession.
Extension in project completion means you will end up paying pre-EMIs for a longer period, making the total cost of availing the loan higher. Note that pre-EMIs neither reduce your home loan outstanding, nor do they provide tax benefits.
Let’s understand this through an example. Suppose you are sanctioned a home loan of ₹50 lakh and so far the bank has disbursed ₹25 lakh, as per the construction status. Assuming that the interest rate is 8.5% per annum, your pre-EMI (per month interest cost) on ₹25 lakh comes out ₹17,708 per month. Hence, a nine-month delay in getting possession would means you will lose approximately ₹1.6 lakh (17708 x 9) of additional interest outgo. Add to this loss your monthly rental outgo. So if you are paying a rent of ₹20,000 a month, your loss increases by ₹1.8 lakh (20000 x 9).
Further, with developers not required to pay a delay compensation since the covid-19 is being considered force majeure, you will lose out on that too.