search2010

Dear All

Getting few questions on EMI from members.

EMI Sharing is nothing but a concept started by builders to "mentally" ease out people from burden of higher "EMI" while construction is still going on and person is staying on rent.

This was way to put burden of higher EMI when person will shift to his/her house. For example, Today I am buying a house with loan of 20 Lakh then I have to pay Rs 19000(Approx. but not correct) as EMI if I am taking flat on down payment. Possession of that flat is after 30 months and during that time i have to pay rent so my monthly out flow will be Rs19 K as EMI + Rent which will increase with time, If due to any reason, there is no salary increment, my expenditure going to increase due to increase in family or getting married,inflation which is making things costly very day, in this way with time even maintaining EMI+Rent will be tough. To solve this problem, Builders/Banks came with concept of "EMI Sharing" in which they said that they will share part/full EMI for a certain time period, in this way till the time there is no possession, burden on EMI will be less/zero on end user however there is one thing that needs to understand by everyone that builder has already put burden of this EMI in cost and once builder EMI sharing will stop , your EMI will be higher.

Now let's understand this with on example :
Mr. A bought flat in Rs 20 Lakh without EMI sharing so he will pay Rs 19,000/month for next 20 years.
Mr. B bought same flat in Rs 22.5 Lakh with EMI sharing where builder will pay Rs10,000/Month as EMI sharing, in this way builder will pay(assuming EMI sharing is for 30 months) Rs 3 Lakh in next 30 months.

Now in this above case, one normal user will understand that he is saving Rs 50,000 because he is giving 2.5 Lakh more in cost but geting Rs 3 Lakh as part of EMI sharing but in actual it is game of "interest" part only. In above case, Mr. B is giving Rs 2.5 Lakh today from bank/self and if calculate simple interest of 10%, you will see that builder will get more money than Rs 3 Lakh in 30 months.

As you can see by above example both builder and customers are happy but most important point in this is "peach of mind" to customer that he needs not to pay EMI for next 30 months which nomrally builders say till possession.


NOW ONE THING IS CLEAR THAT IN EMI SHARING CONCEPT, THERE IS NO DISCOUNT WHICH BUILDER IS GIVING , IT IS JUST SHOWING CALCULATION IN DIFFERENT WAYS. IN SOME CASES, BUILDERS CAN SHOW YOU ABVOE CALCUALTION WITH BENEFIT OF MORE THAN 50,000 BY SHOWING IN DIFFERENT WAY.

Following are the typical EMI sharing methods:

1. Full EMI sharing: In this case, builder will pay full EMI to you for specified period
2. Partial EMI sharing: In this case, builder will share a portion of EMI(for example 2/3) with you

In both cases, builder will give you post dated cheques which first you will deposit in your bank and from your account, EMI will go as usual.

Few things which needs to be make clear while going for EMI sharing:

1. This is you, whom bank will give loan. For bank there is no concept of EMI sharing. Builder will show that your flat cost is higher than normal case and bank will finance you home loan based on cost. Bank will always take EMI from your account. However recently in few projects like Jaypee, banks started subvention scheme where banks were taking EMI from builder account but this type of arrangement is very rare. Even in these types of arrangment most probably builders will give only "interest" part and not full EMI

2.You have to take higher loan from day one and it is just market stragety to show that "Book your flat in Rs 2 Lakh" and start paying EMI after possession.

3.All EMI schemes(99%) will be based on specific time(for example, 24 months or 30 months) but builder will publicize this as "No EMI till possession" but in realty it is for specific time, now if there is delay in project then after this specific period, you have to give EMI from your pocket. Now here is big catch, if there is delay in construction, you will get Rs 5/sq ft as penalty from builder but your EMI will always be very high than this penalty amount so be careful about this.

4. Be careful that whether builder is sharing part of EMI or just part of Interest portion.

5. Normally builders will calculate EMI(part of paritial) based on today's interest rates and if there is any increase/decrease in interest rates in future, it will be pure your risk

6.Once you will get possession, you have to pay higher EMI as compare to if you would have taken flat without this scheme so be ready for that. For example in above example, Mr. A will pay Rs 19000 EMI after possession but in case of Mr. B, EMI will be Rs approx. 22000

7. For EMI scheme , your loan eligibility should be higher then only you can avail this type of scheme.

Let me know you have still any question.

Thanks

Basant

Excellent & very informative...Many thanks search2010.

Kaps_real1

Nice post buddy. Although I didn't go for the projects which offered 'No Emi till Possession', but I used to wonder why every project/builder offer same kinda scheme.

Now the picture is pretty clear. Equal or more amount of money is withdrawn from your pocket in long term.

Thanks .

pulkitgera

in the long run, it will cost you a lot extra since the builder is usually not paying anything from the principle part. the interest accumulated on it during 36 months and the further compounding of the interests will not be a small amount, no matter what the initial loan amount is ...

Such schemes are good only for end users currently staying on rent and for investors looking to stay invested throughout the subvention period, in case the investment is likely to provide good enough appreciation in short term ... for long term investment, 10 years or more, it's not a good option at all ...

gharondabhai

The concept is simple

If you can not afford EMI and Rent simultaneously, still you dream to have a home for you ... then this scheme is for you. Builders and banks are trying to catch this group of people. All the pros and cons of our friend Search2010 applies. In addition, you are stuck to only one bank and their whims. However, for this group of people, priority is to get a roof over their head.

Financial calculation is purely playing with numbers. There are so many factors, you knowingly suppress/hide one factor and your end result will be different. You add one more additional factor (hypothetical) such as investing EMI saving into more yielding scheme... your end result will be even more attractive.

I would rather argue that, in financial engineering, we define a desired outcome and then rearrange the numbers and factors to get there.

Rule of thumb, go for something which sounds rational to you. Ultimately, THERE IS NO FREE LUNCH.

rishisharma

Thanks for you great Article.

I also thought the same concept. Suppose builder getting late to complete our project and and after completing specified time (18 or 24 Years) customer have to pay complete EMI amount even he has no Possession.

viveksh

Usually subvention scheme is available for projects which builder is having difficult time to find customers or badly needs money, as in subvention scheme builder gets whole money upfront X% down-payment from buyer and rest 100-X % bank loan. No emi till possession is always "DOWN-PAYMENT" plan.

There are different versions of No EMI till possession:
After some down payment
1. Builder pays Interest till XX months. In this case (eg. Unitech unihomes) builder says he will give possession in 2 years and thus says he will pay interest till two years and after that buyer will pay the EMIs. But actually no builder gives possession in said time, this is the catch here. Let's say if builder gives possession in 2.5 years it's okay but what if builder gives possession in 4-5 years??? (CLP plan would have been better than this). Builders who are not themselves sure of possession time(or are really sure that possession will delay much) offer such scheme.
2. Builder pays Interest till the actual possession. In this case builder seems to be confident about possession time and just needs cash inflows to keep up the work going. This is the best case in subvention as end user does not need to worry much about delayed possession as he does not have to pay interest till possession.

Note that no builder pays full EMI, it is just the interest part.

No EMI till possession is a good option for someone staying on rent and does not want to pay EMI+rent simultaneously.
For example, Mr.B stays on rent and bought a property under subvention scheme, so he does not have to give any EMI till 3 years, he can save money till possesion(and probably invest in something like RD) and repay some part of loan with this money.

leo.anthony

Hi,

I am looking at purchasing a flat in delhi/NCR region. Heard about CHD developers who is also providing a subvention scheme for its upcoming project Avenue 71.

The deal is I have to pay 15% of the amount as down payment and also won't have to pay the interest for initial 21 months.

CHD is a trustworthy name in Gurgaon.

What do you think I should do?