EMI sharing for those living in rented houses
Rohan has relocated to Mumbai on work and is currently living in a rented apartment. He is shelling out Rs. 20,000 per month for rent. He decides to buy a property under construction but is hesitant because his cash flow will get strained on account of dual payments - he has to pay rent till the time the property is ready for occupancy and also EMIs on the home loan. Like Rohan, many others find it difficult to manage rent payouts with EMI payments. In order to help individuals facing this situation, the developer/builder fraternity has come out with an innovative concept of ‘EMI sharing’ to help customers who find the EMI payment during the construction phase burdensome.
What is EMI sharing?
EMI sharing is arrangement whereby the home loan taker does not have to pay the EMI for the home loan as soon as the home loan is sanctioned. The developer building the property will pay EMIs on behalf of the home loan taker up to a predefined period, which is typically the period up to the possession of the property. This could be anywhere between a year to three years depending on what phase of construction the property is in. The developer will not pay the principal portion but only the interest portion. Some of the builders currently offering this option include Emaar MGF Land ltd, SG Estates Pvt. Ltd., Ramprastha developers among others.
How does it work?
As is the normal case for repayment of home loans, EMIs are deducted from your bank account. If the EMI sharing option has been opted for, the builder/developer will give you a post-dated cheque for the specified period of time which you need to deposit in your account. Of late, for some projects banks have started the subvention scheme where banks take the EMIs directly from the builder. But such schemes are very few in number.
Types of EMI sharing plans
Builders/developers can either pay off the full EMI for the specified period which is only the interest or they could come out with a partial EMI sharing option.
Full EMI sharing scheme: Builder will pay the entire EMI amount on your behalf for the specified period of time which is made up of only the interest element.
- Partial EMI sharing option: There is an arrangement between the home loan taker and the builder on the sharing of the EMI payment. Eg. Builder may pay 50% of the interest portion of your EMI and the balance will have to be paid by you.
EMI sharing option can be opted with down payment, construction linked loans or flexi loans. Down payment option with EMI sharing will be the most beneficial for investors because the under construction linked loans or flexi loans payments to the builder are milestone based and the EMI is charged accordingly to the home loan taker. So the builder’s participation in the EMI will not result in as much saving as in case of down payment. But the big disadvantage of the down payment option is that the builder receives the entire flat cost upfront reducing your bargaining substantially if there is any problem later.
The main advantage for a home loan taker is he is not financially strained by the EMI payments when he has to pay rentals on the house he has taken on lease. This helps him manage his cash flows better.
The proportion of the EMI paid by the developer is a discount offered by him which will certainly reduce the cost of the flat. It is definitely made up for in the sq ft price quoted by the builder which he would have discounted in case down payment or any other payment option. But it serves your need because you do not have to worry about EMI payments during the construction phase as you already have a committed outflow in terms of house rentals.
Things you need to know
All EMI sharing schemes are time bound e.g. 24 months, 30 months etc. So the builders’ obligation is restricted to the predefined deadline. In case of any delay in the project, the obligation of payment of EMI after the predefined deadline rests with the home loan taker. So it is essential for you to look for this clause in the agreement and bargain for the payment to be up to possession which means even if the project construction is delayed, you are covered.
For the bank, you are the home loan taker and hence all payment obligations will rest on you. Your account will be debited every month expect in rare cases where banks have started the subvention scheme.
- The interest rate at which the builder will pay the EMI will be fixed at a particular rate. So if it is a floating rate loan and interest rates were to rise, the payment obligation to the extent of the rise will be borne by you. The builder will not pay for it.
Who should opt for the EMI sharing option?
Builders/developers attractively market this scheme by calling it ‘Zero EMI’ payment till possession, or low EMIs before possession. The EMI payment before possession done by the builder is taken into consideration by him while quoting the price of the flat. So do not get fooled by the marketing strategy. EMI sharing option does not provide you with additional discount and hence do not opt for this scheme for this reason. If discount is what you want then down payment mode of payment without EMI sharing will be the most beneficial because the builder will offer maximum discount as he receives the entire payment at the beginning itself.
EMI sharing scheme is best suited for those who find it difficult to manage cash flows because of dual payments of rent and EMI on the loan, before getting the possession of the property.
If you trust the builder then opt for down payment with EMI sharing to enjoy maximum cost advantage. Here since the builder receives the entire amount upfront and so you are at the mercy of the builder. If there is any issue such as delay in construction you will not have any say as the full payment to the builder has already been made. If you are not sure of the builder’s credentials then construction linked plan or flexi plan is the best option. Although you may not end up saving as much money, it is still a much safer option as the full payment is not made to the builder.
Buying a house is a big investment which requires sometimes more than one decade of financial commitment. So let it not be a situation where you initially save some money by way of discounts but later find yourself in a mess where your huge investment is at stake. Don’t lose sight of the big picture for small gains.