Construction-Linked Plan vs. Down Payment Plan – Which Payment Plan to Take
While purchasing a house, many people get confused which payment plan to consider: Down Payment (DP) or Construction Linked (CLP). The Down Payment Plan certainly looks cheaper as most builders offer discount on the BSP (Basic Sale Price); the DP price is usually 5% to 15% less than that is offered in CLP. These plans are available only for flats which are under construction and for ready to move in flats, only down payment plan is available as construction is already done. People prefer to buy under construction flats as they are available at cheaper rates in comparison to ready-to-move (RTM) flats.
Suppose, in an area where the RTM flat costs Rs 50 lacs ($100,000), you will find an under-construction flat for around Rs 35 lacs ($70,000). So, those who cannot afford to purchase RTM flats opt for the under-construction flats as it easily fits in the budget. The only problem with these flats is that it takes around three years to get the possession of the house if there is no delay from the builder's end.
After finalizing the under construction flat, the confusion arises for which payment plan to choose. Builders want buyers to take down payment plan as they will get almost full payment upfront and for that they usually offer discount which reduces the cost of property by around 10%. This will make the cost of the property to Rs 45 lacs ($90,000) only.
People who opt for under-construction flats usually take out a home loan as they cannot afford to pay the full price by themselves. Otherwise, they could have bought RTM flats to reduce the rent they might have been paying. But, if you can afford the full EMI of DP plan and are about to take a home loan for your dream home you need to do some calculations. Don't worry if you are not too good at calculations; check out the below example to get the idea which plan will be better for you.
CLP or Down Payment: Which Plan Is Better?
If you will choose to take the down payment plan, then your loan EMIs will start from the "day 1," while if you take the CLP route, your loan EMIs will start from the day you will receive the possession certificate. And till that time you will have to pay the interest for the loan amount disbursed to the builder by the bank. So, if it takes three years to complete the construction, you will pay the interest amount to the bank for these years and after that your actual EMIs will start. So, you will end up paying this extra interest amount to the bank if you opt for CLP.
Do not panic, there is some relief coming for you; just check these calculations before taking any decision.
Cost of House
INR 5,000,000 ($100,000)
INR 4,000,000 ($80,000)
INR 4,500,000 ($90,000)
INR 3,600,000 ($72,000)
In this example, the rate of interest on the loan is 10% and the loan tenure is 20 years.
EMI - DP Plan
The EMI for Rs 3,600,000 loan would be Rs. 34,741 ($700) for 20 years.
EMI - CLP Plan
In CLP, payment to the builder is linked to construction of the house. So, there will be installments of about 10% almost every 6 months.
EMI Amount (Interest)
April '12 - Aug '12
INR 500,000 ($10,000)
September '12 - Jan '13
INR 1,000,000 ($20,000)
February 13 - Jun '13
INR 1,500,000 ($30,000)
July '13 - Nov '13
INR 2,000,000 ($40,000)
December '13 - Apr '14
INR 2,500,000 ($50,000)
May '14 - Sep '14
INR 3,000,000 ($60,000)
October '14 - Mar '15
INR 3,500,000 ($70,000)
From April 2015, your actual home loan EMIs will start as you may receive the certificate of possession by then. If you pay only the interest amount till the possession, you will have paid Rs 612,497 ($12,250) and the total down payment EMI will be Rs 1,250,676 ($25,000); so overall you will be saving Rs 638,179 ($12,750). This is the amount that will be saved without calculating any interest earned on this amount. So, after calculating only 8% interest on this amount, it will be somewhere around Rs 735,000 ($14,700).
You can prepay this amount to reduce the loan amount.
So, the effective loan amount would be 4,000,000 - 735,000 = 3,265,000/-.
Now, the EMI for 20 years will be just Rs 31,508/- ($630).
Suppose, you opt to pay the same EMI that is for DP plan, i.e. 34,741. Then your loan will end in 15 years and 5 months while the DP plan will continue for 17 years. So, overall you saved EMIs for 19 months, which is eqivalent to Rs 660,000/- ($13,000).
So, it is clear that even if you have the capacity to pay the DP EMIs, it may not be beneficial to pay them; you could instead choose tje CLP plan and save money. If the builder is offering more than 15% discount on DP plans, only then only it may be beneficial to take the DP route; otherwise choose the construction-linked payment plan. If you cannot afford to pay the hefty EMIs, there is obviously no reason to even think about the down payment plan. You also need to live and enjoy the present life and not simply think of your future home.