No EMI till possession – is it worth the risk

Pramodh and Meera, currently in a rental home, are on the lookout for a good property to invest in. Like any other young couple starting out and planning a family, they have had to cut a few corners to make the initial down payment.While hunting for homes, they came across some builders offering them the “no EMI till possession” scheme. Unsure of the benefits of such a scheme, they decided to look into what this entails. Here is what they found.Why the No EMI scheme came about: The real estate community is often at the receiving end of volatility in prices. Blame it on the markets that affect buying power.The onus then falls on builders to come up with innovative ways in which to promote their projects and get potential buyers to invest. One of these schemes is that of “no EMI till possession.”By taking on the burden of EMI of the shoulders of the customer, builders make it more feasible for buyers to invest in a home. They will not have to worry about paying a rent, while also paying an EMI for a home.What is the No EMI Scheme: Also called the subvention scheme, this is primarily a financial structuring scheme that works on the principle of 20:80. As a property buyer, Pramodh and Meera will have to pay only 20% of the property cost upfront to the builder. All EMIs will then begin only after they have taken possession of their home.Till the time of possession, EMIs are paid by the developer to the bank, instead of the home owner doing so.

You will have to do your research on the kind of No EMI scheme being proposed.
• In one, the builder pays a part of interest and principal on your EMI to the bank in a reducing format for a fixed period of time.
• In another, they pay only the interest and the principal amount is deducted from your loan account.

So what are the potential benefits that Pramodh and Meera may look forward to?

Better financial planning:

With such a scheme in place, Pramodh and Meera may plan their finances well. They will continue to pay a rent, while building up resources to pay a regular EMI after possession of their new home.

Timely completion:

Since the builders are now paying the EMIs on behalf of their buyers, the pressure to complete a project on time is higher. This works to the benefit of the buyer who will be ready to move into a home of their own and stop paying rents.

Better value for appreciation:

Paying 20% of the down payment at the time of booking and then holding onto the EMIs till the construction is complete allows the buyer to reap better benefits from appreciation.A project may take approximately 3 years to complete. At the end of 3 years, there is a natural appreciation in price, one that the buyer will be able to benefit from more considering he has only made a down payment based on a lower price rate for the property.What you have to be careful aboutLike all interesting schemes, there is a fine print that you need to look into. Here are some points to keep in mind:

• You need to dig deep into the financial structuring of the scheme and check on whether the builder is actually paying the entire EMI. There are chances that instead of absorbing the EMI, it may be passed down to the buyer through a higher price point. You will also have to check on whether the builder has successfully completed such a scheme in an earlier project.
• Check to see if there is a time limit on the number of years that the developer will pay the EMI. Many builders cap the number of years at 2, irrespective of whether the construction is complete or not. This may not work in your favour.
• Always keep in mind that if the developer defaults on the EMI payment, then you will be liable to pay the same and the bank will hold you accountable.

The best thing for Pramodh and Meera to do is to find a property that is being offered at close to market prices for that particular area. If this property is available under the “no EMI till possession scheme”, then it may be worth their while.They will still have to do the necessary groundwork to ensure that they are making the right decisions.