Paying for your Dream Home – Upfront Payment or Construction Linked Installment Plan?

 

One of my friends had shortlisted his dream Home but was confused which payment plan to follow.

There are usually three payment Plans.

  1. Upfront payment: You pay the builder around 95% of cost upfront with some discount & rest at the time of possession.
  2. Construction Linked Installment Plan: You pay certain % of cost as the construction progresses.
  3. Time Linked Installment Plan: You pay the builder at predetermined regular intervals irrespective of the project progress.

As for my friend, the builder was offering 12% discount on the Basic Sales Price if he made all the payment upfront. It sounded too tempting to even think about the second plan of Interest Free Construction Linked Installment Plan.

But then should my friend go for upfront payment? And if he does how much would he gain?

In this post I would try to answer these questions.

Reasons &  risks which are well known for avoiding upfront payment:

  1. Given the maze of regulations and the number of permissions required at every stage, even the most well-intentioned builder cannot promise a firm delivery date. And this shows in all the project delays that happen.
  2. If at any stage the project is scrapped or it doesn’t progress you tend to loose a lot if you have made an upfront payment
  3. There is always pressure on builder to complete the project at the earliest so that he can demand the next installment. So eventually the project progresses faster if most of people invested have opted for Construction Linked Installment Plan
  4. And then there could be several such reasons you can think of.

Financial Calculations:

But other than these let’s see if the discount makes sense by doing some simple maths.

I have taken example of Omaxe New Heights, Faridabad project which is open for booking and the (un)official date of possession is 3 years.

*******This Analysis was done 3 years back and hence the price is low but the analysis still holds true!********

About the project:

  • Project Name: Omaxe New Heights, Faridabad
  • Accommodation: 3 B/R, Living, Dining, Kitchen & toilets + Study
  • Area: 1350 sqft
  • Basic Sales Price (BSP) after initial discount: Rs. 2523500
  • Car Parking: Rs. 150000
  • EDC/IDC: Rs 168/sqft = 226800
  • Time to Possession: 36 months

Payment Schemes :

PLAN A Down Payment Plan (12% Rebate on BSP)
At the time of Booking / Allotment Rs.  2.5 lac.
Within 45 days of Booking 20% including booking Amount
With in 60 Days of Booking / Allotment 75% of BSP + 50% Additional Charges
On Offer of Possession 5% of BSP + 50% Additional Charges+ Other Charges (if any)

 

PLAN B Interest Free Construction Linked Installment Plan
At the time of Booking / Allotment Rs.  2.5 lac.
Within 45 Days of Booking / Allotment 20% including booking amt
On start of excavation 10% BSP
On Casting of Stilt Roof 10% BSP + 50% EDC & IDC
On Casting of First Floor Roof 10% BSP
On Casting of Third Floor Roof 10% BSP
On Casting of Sixth Floor Roof 7.5% of BSP+50% Additional Charges + 100% PLC (if any)
On Casting of Ninth Floor Roof 7.5% of BSP
On Completion of RCC Structure 5% of BSP
On Completion of Internal Plaster 5% of BSP
On Completion of External Plaster 5% of BSP
On Completion of Flooring 5% of BSP + 50% EDC & IDC
On offer of Possession 5% of BSP + 50% Additional Charges+ Other Charges (if any)

Assumptions:

We assume that the Opportunity cost (The returns you would generate by investing some where else like Mutual Funds, Fixed Deposit or your Business) for the down payment is 10% per annum – which is equal to the average Home Loan Rates.

For Construction Linked Plan each installment is due at equal intervals of 3.25 months

Calculations:

PLAN A Down Payment Plan (12% Rebate on BSP) # of Months Payments Made Present Value of Payment
At the time of Booking /Allotment Rs. 2.5 lac. 0 2,50,000 2,50,000
Within 45 days of Booking 20% including booking Amount 1.5 1,94,136 1,91,734
With in 60 Days of Booking / Allotment 75% of BSP + 50% Additional Charges 2 18,53,910 18,23,393
On Offer of Possession 5% of BSP + 50% Additional Charges+ Other Charges (if any) 35.5 2,99,434 2,23,026
Present Value of All the Payments Made 2,488,153 

 

PLAN B Interest Free Construction Linked Installment Plan. # of Months Payments Made Present Value of Payment
At the time of Booking /Allotment Rs. 2.5 lac. 0 2,50,000 2,50,000
Within 45 Days of Booking / Allotment 20% including booking amount 1.5 2,54,700 2,51,549
On start of excavation 10% BSP 3 2,52,350 2,46,145
On Casting of Stilt Roof 10% BSP + 50% EDC & IDC 6.25 3,65,750 3,47,263
On Casting of First Floor Roof 10% BSP 9.5 2,52,350 2,33,219
On Casting of Third Floor Roof 10% BSP 12.75 2,52,350 2,27,013
On Casting of Sixth Floor Roof 7.5% of BSP+50% Additional Charges + 100% PLC (if any) 16 2,64,263 2,31,403
On Casting of Ninth Floor Roof 7.5% of BSP 19.25 1,89,263 1,61,319
On Completion of RCC Structure 5% of BSP 22.5 1,26,175 1,04,684
On Completion of Internal Plaster 5% of BSP 25.75 1,26,175 1,01,898
On Completion of External Plaster 5% of BSP 29 1,26,175 99,187
On Completion of Flooring 5% of BSP + 50% EDC & IDC 32.25 2,39,575 1,83,319
On offer of Possession 5% of BSP + 50% Additional Charges+ Other Charges (if any) 35.5 2,01,175 1,49,840
 Present Value of All the Payments Made 2,586,840

 

 Total Cost:

  1. Plan A: Rs. 2,488,153
  2. Plan B: Rs. 2,586,840

Actual Gain if you take plan A: Rs. 98,686 – or 3.97%

Some More Scenarios:

Question 1: What if the project gets delayed? Below is table showing the loss/gain you would make if you choose Plan A over B.

Years to Possession Plan B Cost Plan A Cost Plan B – Plan A % gain
2 26,78,215 25,12,532 1,65,684 6.59%
3 25,86,840 24,88,153 98,686 3.97%
4 24,84,910 24,67,013 17,897 0.73%
5 24,05,382 24,47,120 -41,738 -1.71%
6 23,30,237 24,31,243 -1,01,006 -4.15%

If Omaxe gives you early possession in 2 years you would be gaining 6.5% while if it delays the project by 1 year & you get the possession in 4 years, you would gain 0.75%. If there is further delay you would be actually making losses.

Question 2: What if my opportunity cost is not 10% but 8% or 12% per annum?

I have assumed that you get possession in 3 years as promised. Below table shows how much you gain depending on your opportunity cost.

Opportunity cost Plan B Cost Plan A Cost Plan B – Plan A % gain
8% 26,44,645 25,08,162 1,36,483 5.44%
9% 26,15,459 24,98,052 1,17,407 4.70%
10% 25,86,840 24,88,153 98,686 3.97%
11% 25,58,775 24,78,460 80,315 3.24%
12% 25,31,251 24,68,966 62,285 2.52%

So we see that as opportunity cost (or home loan interest rate) goes up you make lower gains. Above 15% you would be making losses by choosing Plan A.

Question 3: What if my builder is offering me 8% or 15% discount for upfront Payment?

The table below shows Actual Gains you make on the stated rate of discount by the builder, assuming that the project is completed in 3 years & your opportunity cost is 10%.

Discount Rate Plan B Cost Plan A Cost Plan B – Plan A % gain
8% 25,86,840 25,86,310 530 0.02%
10% 25,86,840 25,37,232 49,608 1.96%
12% 25,86,840 24,88,153 98,686 3.97%
15% 25,86,840 24,14,536 1,72,304 7.14%
20% 25,86,840 22,91,841 2,94,999 12.87%

At higher discount rate say 15%+, it totally depends on your risk profile – are you willing to take the risk for the gains you would make!

To conclude

What appears to be 12% discount by taking Down Payment Plan actually turns out to be 4% in real terms. Moreover Down Payment Plan is very high risk plan. Also if the Possession is delayed by even 1 year you make no gain and after 1 year delay you actually are sitting on a loss.

So it always makes sense to choose Construction Linked Installment Plan.

5 thoughts on “Paying for your Dream Home – Upfront Payment or Construction Linked Installment Plan?

  1. Hi Amit, i am interested in opening a recurring deposit a/c in sbi with 10000 per month for 27 months.. My matured amount will be 3 lakhs. Now, while withdrawing 3 lakhs from bank. Do we need to pay any tax to government or to bank. or after withdrawing do i need to pay tax to government? please clarify amit.. sincerely waiting for ur reply

    • Hi Sairam

      The bank would not deduct any tax from your maturity amount of Rs 3 Lakhs but you would yourself have to add the interest income to your income and pay tax according to your tax slab. So for recurring deposit there is no TDS but you still need to pay your taxes!

      Amit

  2. The comparison is very clearly and well explained. Agree with you that the instalment plan is preferable over the upfront payment plan, even though the latter is discounted.Especially, if one plans to take a loan for the major part of the funding.In the upfront option, the entire loan is disbursed in one go, and the interest starts ticking from day one.. Most construction projects never meet their timelines and a large number of them get stuck midway.. At least when one takes a loan on instalment basis, he or she pays interest only on the amount of loan availed.

  3. Very eye opening analysis

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