Buying an under construction property? Here are some loan facts

Have you invested in an under-construction property and taken a loan amount for the investment? Well, here are few facts which you should know before investing in an under-construction property.

Most of the under-construction properties estimate about 20 percent less when compared to the prevailing rates in the locality. While many prospective buyers are willing to invest in projects, builders are geared up to attract the home buyers through all sorts of their tactics.

Cautionary measures to be taken by a home buyer:

Despite festive seasons, property prices are skyrocketing except for few freebies by popular builders. On the other hand with the interest rates dropping down, the property buyers are tempted to indulge in under-construction projects offered at cheaper price tags. Characteristically, these under-construction properties quote at least 20 percent lower than the prevailing rates in a locality. It is very important that a home buyer should check the properties under construction with a vigil as apart from being risked by the project delay, the home buyer may also experience few financial hiccups in case of a delay.

With the real estate market in India not faring well in the last few years, there are various developers who are compelled to divert money from the pre-launch projects to the projects nearing completion. Talking about the buyer’s loss, a delay in his invested project will cause him severe financial strain as he will have to pay the EMI along with the rent simultaneously. In case the project is stalled, the home buyer should still pay the interest and the principal component of the disbursed amount to the bank.

Points to consider while seeking a home loan for an under construction property:

EMI payments on sanctioned loan amount:

A bank gives a loan amount in tranches to the builder in case of an under construction property and the property buyer is expected to pay the EMI on the sanctioned loan amount and not the disbursed loan amount. However, if a person has taken a loan amount of Rs 70 lakh with the bank disbursing only 20 lakh to the builder, the home buyer should pay the EMI for the complete 70 lakh. Also there will also be a construction risk involved for both the buyer and the bank. The increase in the risk factor has resulted in an elongated period of loans for about 25 years wherein the banks demand for the repayment on the whole loan amount.

It is advisable that a person pays the EMI in the sanctioned loan amount since the principal component of the home loan will be quite higher resulting in a reduction of the home loan tenure. It so happens that most of the home buyers invest in under-construction property with an intention to sway away their loan repayment. However, the huge EMI repayment can cause the buyer a financial strain, especially, if the borrower is repaying the monthly rent over and above the home loan EMI. Perhaps, it is safer to invest in a ready-to-move-in house.

In case of project delay, there is higher liability:

In case there is a delay in project, the borrower will be responsible to pay away the dues and the loan amount will be settled once the borrower completes paying away his interest and the principal amount component of the loan amount disbursed to the builder. However, while buying an under construction property, the home buyer should consider the track record and reputation of the builder. If the builder is quite well-known and can be trusted, the risk of being cheated comes down and a home buyer will get his home on time. Also the builder will be financially sound which can let him complete and deliver the project without having to rely mostly on cash flows generated purely from sales of units in the project. In most of the cases, reputed builders are compelled to use the money from pre-launch projects to their projects which are yet to be completed.

Perhaps, if a person is borrowing an amount of about 70 percent of the property value, it is advisable that he/she invests in a project which is in the last stage of its completion or is a ready-to-move-in apartment. It is very important that a home buyer checks if the property in which he is investing is already mortgaged with a lender and in case the property is already mortgaged with a lender, demand for a no-objection certificate from the lender before signing the deal with the builder. Having an NOC will help in a recourse for the home buyer if the developer is faulty on his loan.

Absence of tax benefits in under construction phase:

A person seeking home loan can claim tax exemption on the interest payments of up to Rs 1.5 lakh and Rs 1 lakh under the Section 80C for the principal repayment. However, the buyer cannot avail tax benefits under the pre-construction phase even if he/she has started the repayment of the housing loan. According to Section 24 of the Income Tax Act, 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 taken for deduction in five equal installments from the year the construction is complete. One can also avail the tax benefits while filing the income tax returns. Also the Section 80C permits the tax benefit for the amount paid towards the stamp duty and the registration process.

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