Know These Loan Facts Before Going for an Under-construction Property

Vidyalaxmi explains the risks involved in these projects and tells what home buyers can do to reduce their loan burden     With the festive season just around the corner, prospective house buyers are coming back to the market. Builders too are ready to indulge in some gimmicks to catch these prospective buyers' attention.  With property prices remaining sky-high and the interest rates yet to ease significantly, many prospective buyers would be tempted to check out under-construction properties for their cheaper price tags. Typically, these under-construction properties quote at least 20% lower than the prevailing rates in a locality. Of course, you can check the properties under construction, but do it with open eyes, because apart from the obvious risk of delay (it could even be indefinite in some cases) in construction, you may also get some other financial hiccups if there are long delays.  "The last few years have not been kind to real estate developers. Even some reputed builders are forced to divert money from pre-launch projects to the projects nearing completion," says Shweta Jain, director (residential services) at Cushman & Wakefield. The delayed possession of the house could exert severe financial pressure on the buyer if he has to pay the EMI as well as the rent at the same time. Moreover, if the project gets stuck or even defaults, the homebuyer is still liable to pay the interest and the principal component of the disbursed amount to the bank. If you are taking a housing loan to buy an underconstruction property, here are some points you should always remember. EMI PAYMENTS ON SANCTIONED LOAN AMOUNT  In an under-construction property, a bank disburses the loan amount in tranches to the builder. However, you may be expected to pay the EMI on the sanctioned loan amount and not the disbursed loan amount. For instance, if you have taken a loan of . 70 lakh and the bank has disbursed only . 20 lakh to the builder, you may have to pay an EMI for the entire . 70 lakh, which is . 67,552 at 10%. "There is a construction risk involved both for the bank as well as the homebuyer. Earlier, banks were promoting pre-EMIs and part-repayment of loans. Now with the increase in risk factors and elongated period of loans, such as 25 years, banks ask for repayment on the whole loan amount," says Harsh Roongta, CEO, Apnapaisa.com.  It makes financial sense to pay the EMI on the sanctioned loan amount, as the principal component of the home loan will be much higher, which will reduce the tenure of the loan.  "In the above example, the interest component of the EMI is calculated on the disbursed amount. If the borrower starts paying the full EMI from  the first month, the loan will be repaid in 197 month as against 240 months," adds Roongta.  However, borrowers often invest in an underconstruction project with the intention to stagger the loan repayment. This huge EMI outgo from the first month can also be a strain on the pocket, especially if the borrower is doling out a monthly rent over and above the home loan EMI. The borrower would have been better off buying a ready-to-move-in house.  HIGHER LIABILITY ON YOU IN CASE OF  PROJECT DELAY OR DEFAULT  If the project delays or defaults, the liability is on the borrower to pay off the dues. The loan will be settled only after the borrower has paid off the interest and the principal component of the loan amount disbursed to the builder. Hence you should consider the "track record and reputation" of the developer while buying an underconstruction property.  "The risk comes down if the developer is a prominent and trusted one with many timely completed projects and is financially sound to be able to complete and deliver the project without having to rely too much on cash flows generated purely from sales of units in the project," says Shweta Jain of Cushman & Wakefield.  This has been a growing concern especially since 2008. Even some reputed builders are forced to divert money from pre-launch projects to their projects nearing completion. Hence, if you are borrowing up to 70% of the property value, it is better you opt for a project which is close to completion or a ready-to-movein house. Also, do check if it is already mortgaged with a lender. If the property is already mortgaged with a lender, do insist on a no-objection certificate from the lender before entering into a purchase agreement with the builder. This NOC can act as a good recourse for the home buyer if the developer defaults on his loan.  NO TAX BENEFITS IN UNDER-CONSTRUCTION PHASE  A home loan borrower can claim tax exemption on interest payments up to . 1.5 lakh and another . 1 lakh under Section 80 C towards the principal repayment. However, you cannot seek these tax benefits in the pre-construction phase, even if you have started repaying the housing loan. "The Section 24 of the Income Tax Act states that if a property is still to be constructed, there will not be any deduction on the interest payment all of those years. The interest for the pre-construction period can be availed for deduction in five equal installments from the year the construction is complete," says Vaibhav Sankla, director, H&R Block India. You can avail the tax benefit at the time of filing your income tax returns.  The Section 80C allows tax benefit for the amount paid towards the stamp duty and the registration process. "However, the tax rebate on principal repayment may not be allowed when the property is under construction," he adds. If there is a delay in the possession of the property, the tax benefits also get delayed to that extent.  vidyalaxmi.v@timesgroup.com