Construction-linked plan: Things to keep in mind while taking loan

• Follow

Purchasing a home is a dream for most people, but it’s not as easy as it sounds, thanks to the rising cost of property and land value across tier-1, -2, and -3 cities in India. It’s a well-known fact that going the home loan route is one of the easiest and most efficient ways to own a property to counter the rising costs.

But, did you know there are a couple of workable loan plans? While one is a construction-linked payment plan (CLP), the other is possession-linked. These payment options benefit both buyers and developers.

Differentiate the plans In a possession-linked plan, part of the property value will be paid at the time of booking, and the remaining, when the developer offers ownership of the unit.

On the other hand, in a construction-linked payment plan, the lender doesn’t pay the entire amount to the developer in one go, but in a systematic fashion.

Take, for instance, you want to construct a house on a land that is in your father’s name. The developer/ engineer draws up a plan according to your needs and the corporation/ municipality’s requirements and presents you with an estimated cost of construction.

Meanwhile, the lender says he can provide you with only 80 per cent of the total cost as a home loan — taking into consideration your loan eligibility and other documents — and will provide it to you in tranches. For example, when a portion of the construction is completed or a slab is laid, the lender disburses a pre-decided amount to you or the developer.

In the beginning, the token amount is disbursed, followed by two to three calendar-based instalments; the rest of the amount is based on the progress of the construction.

In simple terms, once the initial amount is disbursed to get the ball rolling, the developer will have to start building the house in say, five stages. The lender will then keep inspecting the construction at regular intervals and accordingly approve the disbursals.

The amount that is disbursed to the developer is pre-decided among you (the borrower), the lender, and the builder. Generally, 95 per cent of the amount is disbursed till the completion of the project, and the rest 5 per cent on the possession of the property.

What to watch for

1. Setting a budget It is important that you carefully consider your needs and the various options that are available in the market. In the eventuality of you opting for a construction-linked payment plan, the first and foremost priority is for you to set the right budget. How tough can it be to set a budget, right? It seems easy, but it may not be. You must strike a balance between being too conservative and missing out on a larger or better home, and being over-ambitious and struggling with financial obligations.

2. Thorough research is a must Before you jump into the construction-linked payment method, here is a food for thought. Is the builder known for keeping his projects alive? What other projects has he worked on and have any of them been stalled before? Which are the financial institutions that offer you the best rate of interest for the loan? Has the land where your home will soon be erected been cleared of all the regulatory paperwork? Additionally, builders draw 90-95 per cent of the value from the lender sometimes and delay the delivery of the property by 2-3 years. In such cases, you not only have to wait longer for the delivery but also bear the interest burden. Try to find clear answers to these basic questions to get the legwork going. Rest will automatically fall in place.

3. Tracking the economy Keep in mind that construction-linked plans work only when the progress of the building continues. In case of an economic downturn, the cost of your labourers and raw materials used for construction shoots up, making it difficult for the builder to get the project going. This, in turn, takes an effect on the funding with the lender not releasing funds because the construction criteria may not have been met.

Construction-linked payment plans may seem like a win-win situation for all parties involved in the transaction, but previous instances have revealed its flaws when certain builders and financial institutions colluded for their own benefits. So, it is advised that you do the homework right before starting work on your dream home.

The author is  CEO and Co-Founder, Basic Home Loan. Views are personal