What is deferred EMI option?
A slowing real estate market has led developers to think up creative solutions to offset a declining top line. Under the deferred EMI option, developers tie up with leading home loan institutions and agree to absorb the interest component of the EMI on behalf of buyers. Depending on the offer, EMI’s may be deferred for a period of 12, 15 or 18 months. As yet, I have not seen developers offer deferred EMI option beyond 18 months. Of course, the longer the EMI deferment, the more advantageous it is for you as an investor.
How to analyse deferred EMI offers?
To determine suitability of a deferred EMI offer, I will make a specific comparison between a deferred EMI option and an apartment from the resale market. Both projects are in Gurgaon, are comparable in quality, location and builder reputation. At first, let’s evaluate the deferred EMI option:
Deferred EMI option-Unitech Harmony in Nirvana Country
1.Determine the total cost and size of apartment. For simplicity, I have assumed total price of apartment to be price multiplied by size of apartment (I have not included extras such as car park, EDC, IDC, etc.)
2.As of this writing, the offer price on Harmony apartments by Unitech is Rs.4700 psf. Let’s assume a size of 1750 sq ft. Therefore, price is Rs.82.25 lacs (Rs.4700 X 1750)
3.Under the deferred EMI plan, the bank/developer will ask the buyer to pay 10% of the amount upfront before the bank makes the balance 85% payment.
4.Therefore, as a buyer you will be required to pay Rs.8.23 lacs (10% of Rs.82.25 lacs)
5.The bank will pay 85% to the developer (Rs.69.91 lacs) and the balance 5% will need to be paid by you at the time of possession of apartment (24 months from now).
6.In the above example, the amount of interest that the developer will have absorbed on your behalf is Rs.11,53,515 (Rs.69.91 lacs @11.00% for 18 months).
This is the point where everything becomes fuzzy. On the face of it, it looks great to know that Unitech is going to absorb Rs.11.54 lacs on the buyers behalf towards interest. Prima facie this appears to be a discount on the sticker price of Rs.82.25 lacs. However, this would be the wrong way of analyzing this offer. This offer needs to be analysed in comparison to other deals available in the market.
Firstly, in deals available in the resale market, you are not required to pay 95% (10%+85%) of the payment in 30 days. Such an amount is paid over a longer stretch of time-normally 24 months. Therefore, the gainer in such an arrangement is Unitech and not the buyer since in reality buyers are not required to pay the entire amount upfront in a construction linked plan. Therefore, if buyers were paying interest on their own, they would not pay interest on 85% from Day 1. This offer is somewhat akin to buying a car with a gold steering wheel and gold music system while you don’t need either of them. The seller of the car then gives you a 50% discount on the sticker price but in the end the car is still 25% more expensive than other cars in the market! In summary, you are being made to feel good about something you don’t really need.
Resale market option-Vatika Jasminium in Vatika City
1.Possession of this apartment building is expected by December, 2009.
2.As of this writing, Vatika Jasminium apartment in Vatika city is available for Rs.3500 psf.
3.Total cost of a Jasminium apartment will therefore be Rs.61.25 lacs. (Rs.3500 X 1750 sq ft)
4.Assuming you take a home loan, the bank will ask you to pay 15% of cost of apartment before they start making payments. This would be Rs.9.19 lacs. (15% of Rs.61.25 lacs)
5.As of this writing, approximately 50% payment towards this apartment has already been made i.e. Rs.30.63 lacs. Of this, Rs.9.19 lacs will be your contribution and the balance will be by the bank i.e. Rs. 21.44 lacs.
6.Since this is not a deferred EMI plan, you will be required to pay interest on this amount of Rs.21.44 lacs from Day 1.
7.Total interest to be paid on Rs.21.44 lacs over 18 months @ 11% p.a. will be Rs.3,53,760 (A)
8.Additionally, over the next 18 months period the developer will ask for more payments, say another Rs.24.50 lacs.
9.Rs.24.50 lacs is not the average over 18 months but the total amount paid. Let’s assume the average during this 18 months period is Rs.20 lacs. Therefore, interest cost on Rs.20 lacs @ 11% p.a. over 18 months is Rs.3.30 lacs (B)
10.Therefore, total interest cost incurred over 18 months period will be (A) + (B) =Rs.6,83,760
11.Total cost of apartment is Rs.68.09 lacs (Rs.61.25 lacs + Rs.6.84 lacs) at the end of 18 month period.
Prt ima facie the deferred EMI plan may appear very attractive. However, on close examination, buying the apartment in resale markets is clearly a better option. This may not always be the case in all comparisons. In the above example, I have simply highlighted a methodology. You may apply this approach and methodology to evaluate any deferred EMI option with other available options in the market.
There are two very dangerous aspect hide out under deffered EMI option.
Firstly, under this scheme developers gets 95% of the flat value in his pocket and bank gets the upfront interest for the 18 months on NPV basis.The only loser in this case is the customer. It is the customer who loses the cash down discount because under this scheme developers never offer the cash down discount to the customer inspite of the fact that they received 95% of the flat value upfront. In other words, It is the customer who is paying upront interest to the bank routed through builder.
Secondly, in case of the delay in the custruction of the project and possession got delayed by more than 18 months. Bank will start taking the EMI after 18 months.This is the hide out aspect of this scheme which is never explained to the customer.
So My sugeestion are:
1. The customer go for custruction linked plan both under resale or direct allotment deal. Your funds are safe in case of delay of project and you will pay the interest only on the drawdown amount from the bank
2. If you are brave enough to go for the cash down payment to builder in current scenario then instead of going for the Deffered EMI scheme plan, one should raise the loan upto 85% of the flat value and avail the cash down discount (which is normally 8-10%) from the builder and start paying the EMI to the bank (provided you are comfortable in paying the EMIs)
thanks - meridharti.com /*added buzzr for google buzz */
0 comments:
Post a Comment