Under-construction properties are certainly more affordable than ready-to-move-in units, and that’s one reason why they were so popular among buyers during the real estate boom a decade ago. But with increasing cases of delay and defaults, buyers’ confidence in under-construction properties has eroded. A recent home loan product by the State Bank of India (SBI), Residential Builder Finance with Buyer Guarantee scheme, aims to restore the confidence by offering to pay back the principal borrowed in case the developer defaults. The idea sounds good, but should you go for it?
Our analysis shows that like any other financial product, this too has caveats you must consider. According to Gaurav Gupta, CEO, MyLoanCare, an online loan marketplace: “Of late, most of the home loans that finance companies have disbursed are either for resale properties or ready-to-move-in houses. Lenders are stepping in to boost the confidence of buyers to go for under-construction houses by offering new products. Before a homebuyer looks at them, they must understand the caveats and conditions."
Safeguards for completion
SBI’s new loan product is more about the safeguards it has put in to ensure project completion than the guarantee it offers on the principal amount. The bank only works with developers that have a track record of completing projects on time and are well-funded. “We will choose the builder we want to work with after evaluating it, based on different parameters," said an SBI official, who spoke on the condition of anonymity because he is not authorized to talk to the media.
The bank will restrict itself to projects worth up to ₹400 crore in the affordable segment, which is clocking maximum sales currently.
SBI will also be the sole lender to the project it chooses for the loan product. The bank won’t allow the developer to raise any other loan for the project or even keep outstanding bills with sundry creditors like suppliers of cement, steel, and so on, beyond a few days. All this allows SBI to have total control on the cash flows of the project and make sure that the project is on track. “This will ensure that no one else can initiate Insolvency and Bankruptcy Code (IBC) proceeding against the developer at the National Company Law Tribunal (NCLT)," said the official.
How the guarantee works
The guarantee will be offered by the developer; SBI will fulfil it being the banker to the builder. When a buyer approaches the developer to buy an under-construction flat, the builder will ask if the purchaser needs a guarantee for timely project completion. If the buyer is willing, the developer will give a guarantee to pay the principal amount in case of a delay, provided the buyer compulsorily takes a home loan from SBI. However, it is the builder who will pay the bank for the guarantee and not the homebuyer.
In case of a delay, if the buyer exercises the guarantee option, he would need to relinquish the right to the house. The guarantee will merely free the buyer of the liability he has towards SBI as a borrower. The interest amount paid will remain with the bank, and the down payment with the builder.
Say, the cost of the house is ₹50 lakh and the borrower takes a 20-year loan of ₹45 lakh at an interest rate of 8.2%. He also pays ₹5 lakh as down payment. If the possession is due in four years but there is a delay and the buyer invokes the guarantee, the buyer will not have any liability towards SBI, which otherwise would have been around ₹40.78 lakh. However, he will have to relinquish the ownership of the house. In addition, he will lose the ₹5 lakh down payment, and the interest payment over four years (around ₹14.12 lakh).
Besides, the buyer won’t be able to approach the concerned real estate regulator as he would have relinquished his rights to the property.
In case of a delay, it would be better to invoke the Real Estate (Regulation and Development) Act or Rera instead of the guarantee. At Rera, the buyer can ask for a refund of the money (down payment and loan principal) paid to the developer along with the penal interest that the real estate regulator will award.
Buyers can also seek relief under IBC if 10% of the buyers or 100 of them, whichever is lower, agree to file a case against the developer. “Homebuyers can seek other reliefs available. According to the contract, SBI’s responsibility is restricted to the principal. Litigation is time-consuming. Claiming the guarantee would be faster. But with the safeguards in place, we don’t think any project would be delayed," said the official. Also, the bank or the builder won’t force the buyer to take this product.
The guarantee shouldn’t be the trigger for you to buy in a project. However, the chances of delay in such a project will be lower, given that SBI would do its due diligence before offering such a product.