EMI sharing : What's good, what's not

When the going gets tough, you can trust builders – that tough breed - to do what it takes to beat the odds. So, in 2008, when the real estate market got sticky, and all their slick hard-sell (exotic apartment names, ‘world-class' amenities, chance to travel abroad) and special offers (free gold coin, free car parking, early bird discounts) failed to woo the reluctant home-buyer, builders pulled out an old rabbit from their hats. Many of them revived the ‘EMI sharing scheme', also known as ‘no pre-EMI scheme' . This scheme is quite in vogue today, with steep real estate prices keeping away many potential buyers. Many a builder dangles the EMI sharing carrot to hook on buyers to their projects. But should buyers bite the bait? Let's see.

What's the deal?

Unlike many other special offers where the ‘free' component usually has a cost attached (in the form of inflated per square foot rates), genuine EMI sharing schemes (do read caveats below), can save good money for home buyers. Under an EMI sharing offer, the builder undertakes to pay interest on the buyer's home loan, till possession of the house is handed over, or for a certain specific period, say 24 months. In the normal scheme of things, pre-EMI payment (interest on the home loan before completion of construction, and before commencement of the equated monthly instalment) is borne by the buyer. Shifting of this burden to the builder could translate into tidy savings for home buyers. This scheme may come handy especially for buyers living in rented premises, whose could find their finances stretched paying both rent and pre-EMI. For the builder too, the scheme is a money-saver as he gets funds at a cost (the home loan borrower's rate) lower than what he would otherwise have to pay in the market.

The buyer makes a down-payment (say around 20 per cent) to the builder with the balance 80 per cent financed through a bank loan. Depending on the agreement between the buyer, bank and the builder, the bank either releases most of the loan amount (say 85 to 95 per cent) to the builder up-front (with the remainder given on completion of construction), or the loan amount is disbursed in stages (linked with the level of construction).

The builder then bears the interest on the amount disbursed by the bank, either till possession or for a specific period.

What the buyer saves is essentially the interest cost which he would have incurred till possession, had he gone for normal construction linked loan disbursement schemes. This amount can be substantial.

Assuming a pre-EMI period of around two years, loan amount of Rs 30 lakhs, interest rate of 9.5 per cent and usual construction linked payment schedules, a sum in excess of Rs 4 lakh towards interest could be saved by buyers under an EMI sharing scheme.

Caveats

But, like most goods things in life, this scheme too has dangers, which buyers should know about . Firstly, there is a possibility that the builder may have padded in his cost towards interest payment in the per square foot selling rate.

Alternatively, the builder may not offer discounts available to other buyers. In either case, buyers may not really gain, since, though they may save on cash flows initially, they would have to shell out more towards EMI after possession is granted. So, it's important to check whether you are losing out on rates/discounts. Enquire whether rates for houses under the EMI sharing scheme are higher than that for other homes in the project/similar projects in the neighbourhood. Bottomline: Do the math to ensure that you are getting a good deal.

Another big risk is that of the construction/possession of the house being delayed. This could cost buyers dear. For, irrespective of the builder living up to his commitment or not, the buyer is obliged to service the loan given by the bank. The bank assumes no responsibility or shows no benevolence to the buyer if the builder plays truant. Assume that under the EMI sharing scheme, the builder undertakes to pay interest for 2 years.

The buyer's payment meter starts ticking at the end of this period. If construction is not completed by then, the liability to service the loan (interest payments till construction is complete) falls on the buyer. The buyer would then be chasing the builder to deliver the house, while at the same time making payments to the bank. Not a nice situation to be in.

Some takeaways here: Go in for the EMI sharing scheme, only if the builder has a reputation for integrity and timely delivery. Also, at the outset, try to bargain with the builder to extend the tenure of the scheme till possession and not restrict it to a specific time period. This keeps the pressure on the builder to hasten completion and give possession, since he is paying interest till then. Besides, it would be ideal if disbursement by the bank to the builder is released in stages linked to construction. This way, even in case of any adverse eventuality (especially in the early stages), the buyer's liability to the bank may be capped.

A few other aspects merit mention here. Not all banks offer EMI sharing schemes. Also, check whether builders undertake to pay the interest at only a pre-determined rate. If this is the case and the loan is a floating rate one, the liability for any increase in rates would devolve on the buyer. You can also enquire if the builder undertakes to pay penalty if construction/possession is delayed.

Fine print

Finally read the fine-print carefully, especially in the case of such special schemes. The real estate market in India is still largely unregulated and caveat emptor (buyer beware) holds true.

Many builder contracts are rather one-sided (no prizes for guessing in whose favour) and one needs to give close consideration to all clauses before signing on the dotted line.

After all, a house may the single largest investment you may make in your life-time. Make it count.

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