Be careful when going for discount schemes offered by realty developers
With residential sales not picking up pace and inventory piling up, developers are under tremendous pressure. To encourage people to buy, most of them are coming out with schemes offering buyers things such as free parking, modular kitchen, car, gold coins and air-conditioners.
Some have came out with another innovative scheme - home loan interest subvention. Under this, Tata Housing and Dosti Group are offering buyers home loans at the rate of 7.99 per cent. Puravankara Developers is offering loans at 6.99 per cent for select projects.
HOW THESE WORK
The developer offers to lower the interest burden on buyers for the first few years by paying a part of the interest on the loan so that your effective interest rate is lower.
It's simple. You buy from the developer, pay equated monthly instalments (EMIs) to the bank and get the interest differential reimbursed from the developer every month or on a quarterly basis. For example, Dosti is offering to reimburse interest payments over and above 7.99 per cent, with a limit of 10.50 per cent, for the fi rst three years.
If you buy a property from Dosti under this scheme, on submission of the proof of interest payment, the interest differential will be paid to you within 10 days. The scheme is applicable only for the first three years. During this period, you will save interest of Rs 1,50,945, if you have taken a loan of Rs 20 lakh for a period of 20 years.
Similar schemes are being offered by Tata Housing and Puravankara Developers. But before going for these offers you should keep certain things in mind.
BANKS NOT INVOLVED
It is not the bank which is giving discount. It is the developer which is reimbursing part of the interest. You will have to pay full interest to the bank. If the developer fails to reimburse the payment, the matter will be between you and the builder.
Developers have also specified the upper limit for rates. In Dosti and Puravankara schemes, it is 10.50 per cent, while in case of Tata Housing it is 10.20 per cent. If the bank raises the home loan rate to more than the cap, you will have to bear the additional cost. If the bank lowers the rate, you will not get any additional discount. The developer will benefit as he will have to reimburse a lower amount.
Puravankara clearly mentions that the interest reimbursement is only up to 3.51 per cent of the loan amount. The Dosti group has kept the offer flexible. If the rate of interest changes after the booking, the buyer will continue to pay interest at 7.99 per cent only. The difference will be reimbursed by the developer.
Some of these schemes take away from buyers the freedom to transfer the loan. Under the Tata Housing scheme, the buyer can be asked to switch to the lowest home loan rate available in the market during the subvention period. Tata Housing will reimburse the switch/processing fee in such a case. Also, the buyer is not allowed to switch the loan on his own during the interest subvention period.
If the buyer cancels the booking before getting possession within the specified period, he will have to pay back the interest amount availed of as discount along with a penalty of up to 20 per cent in some cases.
LIMITED CHOICE
The scheme is available on limited properties. Also, the interest subvention is for a specific period. In case of the Dosti group, it is for three years. In Tata Housing, it is for fi ve years. Puravankara is offering the benefi t for two years.
UNCLEAR TAX TREATMENT
The tax treatment of these discounts is not clear. These are paid through cheque or real time gross settlement and are treated as income and taxed as per your tax slab. In fact, the developer can deduct tax at source before giving you the fi nal amount.
RISK OF DELAY
Most of these offers are available only on underconstruction flats. In case the developer delays possession, you will have to bear the cost of the delay.
INDIRECT BENEFIT
Price cuts might make customers doubt the credibility of the builder. Keeping their personal interest as well as the buyer's interest in mind, developers prefer offering freebies and discounts rather than reducing prices. A rate cut signifi es erosion of property value, especially to property investors, which is a negative signal. In investor-driven markets like Delhi-National Capital Region, this dents confidence with builder and channel partners. Hence, developers avoid this, says Narasimha Jayakumar, Chief Business Offi cer, 99acres.com.
SHOULD YOU GO FOR THESE OFFERS?
Don't decide on the basis of discounts alone. A house is usually the biggest investment a person makes. So, the decision should not be based on discounts but the utility of the house. Also, try to arrive at the monetary value of the discount, especially when it is not in cash. Calculate the discount as a percentage of the cost. Only if the discount is significant should you go for it. "Buyers should always go for upfront discounts. These are hassle-free and bring clarity. Buyers should bargain for cash discounts," says Surabhi Arora, Associate Director, Research, Colliers International. Also, cash discounts don't attract tax.
