Guide to Payment Plans – Which one Should You Go for?

March 2020

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Unlike yesteryear when down payment was the only option to buy a property, developers these days are offering a number of payment plans to the buyer. The most popular payment plans apart from the traditional down payment plan include construction linked plan, flexi payment plan and time linked plan. All these plans have their pros and cons. Let’s discuss these in details.

Down Payment Plan

This plan requires the buyer to pay 10-15 per cent of the property value at the time of booking, another 80-90 per cent within a given time-frame, which is usually 45-60 days and the rest, at the time of possession. The remaining amount includes the balance amount of the cost of property, the charges levied by different authorities including stamp duty and registration fees, which is around 5% of the property value, property tax, maintenance charges and any other charges of using society amenities such as gymnasium, swimming pool and parking.

Advantages

Down payment plan can get you good discount on the total price of the property because you are paying the money to the builder upfront. No other plan can get you a discount as high as 8-10 per cent.

Risks involved

Down payment plans cost heavily to the buyers when there is a delay in construction and delivery of property. Investors with such plans also run the risk of the project getting struck or even abandoned due to some legal issues. In such cases, recovering money from the developer can be a challenge.

Construction Linked plan

Also known as possession-linked plan, this plan requires the buyer to pay a booking amount, which is usually 10-15 per cent of the purchase price upfront. The remaining amount is linked to construction milestones, 20 per cent with each floor constructed, for example. As against down payment plan, the buyer is unlikely to get a discount under this plan.

Advantages

Since the payment is not timed and completely linked to the construction progress, this plan has least risk for the buyer. Moreover, the builder would also want to complete construction timely to keep the cash flow consistent.

Risks involved

Construction linked plan (CLP) costs a lot to the buyer in terms of interest paid to the lender (bank in most cases) since they have a longer tenure. Only interest payment is due till the property in under construction, principal repayment starts after possession. So, a buyer ends up paying more to the bank.

Time Linked plan

Though not quite popular these days, some developers also offer time-linked plans. These plans require you to make your property installments based on preset timetable decided by the builder. This is irrespective of the construction progress. Some developers offer 8-10 per cent discount on the basic property cost for opting this plan.

Advantages

Apart from the discount that the builder offers for such plans, there is not much to look forward in such plans as these neither give you the time to arrange funds not the surety that the construction will go at the right pace.

Risks involved

The buyer will be bounded to pay the installments even if there is a construction delay. The risk however is lesser than down payment plan because here you pay according to a predetermined structure and not the entire amount upfront.

Flexi Payment plan

This plan requires the buyer to pay almost 50 per cent of the total amount by the time construction starts. This plan is more popular for new launches and it takes approximately 3-6 months from the booking time to pay this amount. The remaining amount is paid as the construction takes place. So, this is like a combination of down payment plan and construction linked plan.

Advantages

Since the buyer is making almost half the payment upfront, he usually gets a 5 per cent discount on the basic cost of the property.

Risks involved

It is difficult to recover money if the project gets hit after booking, especially in the case of new launches. If you compare flexi payment plan with CLP, you have to pay interest on almost 50 per cent amount from the first year itself, while in case of CLP, interest on only 35 per cent amount will be charged. So, flexi plans are costlier than CLPs.

Which construction plan should you go for?

While choosing a plan over the other you must take into account your personal situation in terms of availability of funds in hand and home loan eligibility. Moreover, this decision also largely depends on the reputation and track record of the builder in terms timely delivery of projects.

If you have enough funds and are going for a reliable builder, chose a down payment plan and avail discounts. However, if you are taking loan to finance your property, go for construction linked plans so that the lender (bank) might only disburse the loan based on the construction progress of the property.

Tips for choosing the right payment plan

In all scenarios, make sure that you go for a project that is approved and a builder who has not defaulted in the past and has delivered projects timely. Taking help from a financial consultant and a good property agent also comes handy while choosing a payment plan that can benefit you the most.

Quality Of Property

As a general rule, quality products command a premium. The same goes true in real estate as well. Good quality constructions command a premium over low-quality constructions. The prices of better quality properties also appreciate more than the lower-quality properties. Thus, investors looking for high returns must go for quality, even though they may cost more than the other product available to purchase.

There is no thumb rule to make a profitable investment, however, the above stated factors could help you gauge the expected potential of appreciation. Though there are exceptions in all cases, but in India, these factors have mostly resulted in positive results.

Also read: Factors Impacting Price Rise in Residential Real Estate

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