Banks Must Link Disbursal of Housing Loans to Construction Stages

The Reserve Bank of India regulates the financial institutions in India and issues guidelines to promote transparency and suitability for customers. To enforce this attempt, in 2013, the apex bank issued a directive asking financial institutions to link their home loan disbursals to different stages of construction.

This directive stressed the risk factor of releasing funds early to builders and how it was not in the buyer’s best interest. This led to the mandate of financial institutions linking their loan disbursal to different stages of a house’s construction.

It also pointed out the fact that financial institutions often resort to schemes that focus on disbursing the loan amount early on. Such plans are popularly known as 80:20 home loan schemes.

A housing loan EMI calculator can help individuals learn more about such loan offers in advance and then decide on choosing a lender accordingly.

What is an 80:20 scheme?

The 80:20 scheme is a housing loan plan, where the borrowers pay 20% of the total credit amount as a down payment at the outset. After that, the lender disburses the remaining 80% of the money to the respective developers in advance.

In these cases, financial institutions do not evaluate the stage of development of a concerned property. It means it can be under construction, or there might not be any development started yet.

Typically, schemes like these will include an agreement between the lender, buyer and the developer, where the builder will pay pre-EMIs until the construction is completed or for a pre-determined tenor. Afterwards, the respective borrower will continue with his/her repayment. Debtors can take the assistance of a home loan EMI calculator to learn more about their instalments beforehand.

This scheme is popular among builders and home buyers, and all three parties can benefit from it. At the same time, borrowers should also know about home loan sanctioning and disbursement process at length to avoid any difficulties.

Benefits of this scheme

As already mentioned, all three parties involved in this deal get benefitted from this arrangement; here is how –

1. For developers or builders

Instead of getting business funds from financiers, this is a more cost-effective option for them to fund their projects. For instance, in the current market, the home loan rates are around 7% to 8%, whereas a business loan goes easily above 10%.

Additionally, they are not even responsible to pay off the home loan EMIs — the home buyers are. Therefore, even if they make repayments for a brief period, it is becoming even more convenient for them financially.

2. For borrowers

Borrowers also get benefitted from this scheme.

Since builders often provide additional discounts and pay off a portion of the loan, it can lead to savings for borrowers. The current home loan interest rate makes it even affordable to avail funds.

Individuals can utilise a housing loan EMI calculator and avail the benefits of calculating EMIs before taking a loan.

Additionally, they must look for lending institutions who extend pre-approved offers that can reduce the hassle of loan application. These offers are available on a host of financial products, including home loans and loans against property. Available for existing customers, they can check their pre-approved offers online by entering basic contact details.

3. For financial institutions

Through a proxy lending system like this, financial institutions have managed to fund India’s real estate sector at a considerably lower interest rate. Also, compared to business lending, this is a much more secured option, protected by the respective property.

Nonetheless, no plan is devoid of its share of drawbacks, as mentioned below.

Shortcomings of 80:20 scheme

Here are the prominent shortcomings of this scheme –

i. Advance payments often make builders lose their promptness to complete a project.

ii. Without a construction linked plan, developers often use funds like these to repay their old debts or invest them in other projects, which then delay the one they have accounted the money for.

iii. If they fail to pay the stipulated EMI amount, it hurts a borrower’s credit profile. Also, borrowers have no avenues to get a builder to pay for the late payment fees.

iv. It also increases the delinquency risks for financial institutions when compared to direct loans to builders.

Additionally Read: Here’s how to use the Bajaj Finserv Home Loan Calculate to know your EMI and Eligibility

Despite these drawbacks, the implementation of this new regulation is expected to bring more transparency to the lending process. Also, it will keep all parties accountable for their parts in a loan agreement.

Furthermore, borrowers can always use a housing loan EMI calculator to find a loan offer that can help meet their needs. Also, with assistance from this online device, one can decode the home loan process in India and avoid any mistakes.