A Gurugram-based developer, M3M, has introduced a ‘Pehle Possession Phir Payment’ plan. Buyers pay 20 per cent initially on purchase, 30 per cent in the third year, another 30 per cent on the application of occupancy certificate (OC), and the final 20 per cent in the sixth year. Buyers need to understand the nuances of payment plans properly before opting for one.
Many of these payment plans are meant to incentivise buyers to make their ‘buy’ decision. “Property prices have surged in the past two-and-a-half years. Sales have slowed as a result. Developers are now offering flexible payment schemes to avoid having to cut prices,” says Ravi Shankar Singh, managing director, residential transaction services, Colliers India.
“Developers in Mumbai and Gurugram are offering promotional schemes due to rising inventory and high financing costs,” says Keval Bhanushali, chief executive officer and co-founder, 1 Finance.
Let us evaluate two payment plans that are currently popular in the market.
Construction-linked plans
In construction-linked plans, instalments are linked to the progress of the project. Buyers make an initial payment (usually 10-15 per cent) at the time of booking, and then pay subsequent instalments at various stages of construction, such as completion of foundation, specific floors, and so on.
From the buyer’s standpoint, one positive of this plan is that the builder has an incentive not to delay the progress of construction since payments are tied to specific milestones.
“Buyers are also not burdened with large upfront payments or financial pressure at the time of possession,” says Rajat Likhyani, principal partner, SquareYards.
However, buyers have to pay up to 70 per cent of the total cost by the time the superstructure is ready. “Completion of interiors and plumbing may take an additional two to three years,” says Singh.
Buyers must understand the milestones to which payments are linked. “Make sure the milestones and amount demanded at each stage are reasonable. Also, the milestones should be for the tower in which your apartment is situated rather than average progress of the entire project,” says Pradeep Mishra, founder of Homents, a National Capital Region-based property consultancy.
If construction gets delayed, buyers get stuck. “They would end up paying EMIs without receiving possession, leading to financial strain,” says Likhyani.
Possession-linked plans
Here, buyers pay 10-25 per cent at the time of booking. The balance is paid closer to possession (in one or two instalments) or upon possession.
On the positive side, the buyer’s financial exposure gets minimised. They get time to accumulate the required sum while the project is under construction. “Investors can lock in property prices early while deferring major payments until the property is nearly complete,” says Likhyani.
Singh says that this plan suits buyers who have upfront liquidity. Likhyani adds that buyers must ensure they have the funds ready for the payment (or payments) closer to possession.
Buyers must, however, check that the rate being charged by the developer is not higher than the rate for a construction-linked plan.
How to choose a plan
The payment plan buyers choose should align with their income cycle and risk tolerance.
“Buyers who prefer gradual payments should opt for a construction-linked plan. A possession-linked plan suits those who wish to manage cash flows efficiently while ensuring most payments are aligned with project completion. Those who seek flexibility and lower annual financial commitments may also find possession-linked plans more suitable,” says Likhyani
Points to check
The biggest risk in any under-construction project is of delay or non-completion. “Buyers should verify the developer’s history of timely delivery to prevent funds from being stuck in incomplete projects,” says Likhyani.
Buyers must understand the concept of “time value of money”, which basically means that money now is more valuable than money in the future.
When a developer makes an offer to defer payments from buyers, he bears the cost of funding the project or takes a loan for that period. It’s likely that he will try to extract that cost from buyers. Singh suggests comparing the basic sale price (BSP) across various payment options.
“Back-loaded payment plans are only advantageous to the buyer if the BSP remains stable,” he says. If the developer escalates the BSP to compensate himself for payment flexibility, then the plan may not be to the buyer’s advantage.
Likhyani says buyers must confirm whether banks support the payment structure they plan to go for.
In many payment plans being launched by developers nowadays, one milestone that developers put in is “on application of OC”. Note this is not the same as receiving the OC. “Payment plans linked to OC application are problematic because developers can apply for OC prematurely, triggering payment demands. But the OC may not get issued if the project lacks essential amenities or has other issues,” says Mishra.
Before opting for a plan where payment is deferred to the later stages, compare rates. “Compare the BSP of this plan not just with the rate in a regular, construction-linked plan but also with the rate prevailing in the secondary market,” says Mishra. He adds that sometimes it may be more advantageous to go for a regular plan (construction-linked), or purchase from the secondary plan, rather than opt for a deferred payment plan with higher BSP.
Before choosing a payment plan, compare multiple options, negotiate terms, and consult financial advisors. Understand the plan’s nuances instead of giving in immediately to pressure from the developer’s sales personnel.
Pros and cons of other payment plans seen in the market
Down Payment Plan
- Buyers pay a significant portion of the total amount upfront, typically 10-15 per cent at booking, followed by 80-85 per cent within the next 30-90 days, and the remainder upon possession
- This plan often comes with substantial discounts but requires buyers to have considerable liquidity
- If the builder delays or fails to complete the project, the risk to the buyer is very high
Flexi Payment Plan
- It combines elements of down payment and construction-linked plans
- Buyers pay a portion (often 10 per cent on booking and another 30-40 per cent within 30 days) upfront, with the remaining amount linked to construction progress
- This offers a balance between immediate financial commitment and payment flexibility
Time-Linked Payment Plan
- Payments are scheduled at fixed intervals, regardless of construction progress
- Buyers must adhere to a predetermined timeline, making payments according to the agreed calendar
- While this plan provides a clear payment schedule, it may pose risks if there are construction delays, as payments are not tied to project milestones
