Going For The Right Scheme: Decoding Construction & Possession-Linked Payment Plans

The real estate market is full of discount offers and schemes. While these may look lucrative, having a close look at all the aspects is crucial. Among the many schemes come construction-linked and possession-linked payment plans.

PropGuide on what and how beneficial they are from a buyer's point of view:

Construction-linked payment plans

Construction-linked payment plans (CLP) are the payment plans where banks release the loan amount to the developers in India when they complete certain construction milestones. To lower risks, banks came up with CLP plans to incentivise fast construction and also cut down inordinate delays in possession of homes causing inconvenience to home buyers. This mode of payment cuts down the risk for the bank as well as the home buyer.

Though banks are launching low-risk plans, the success rate of these plans in bringing down home possession delays has been low. A large sum of the payment by banks is done after the entire structure is created with only interiors left. Generally, it takes less than a year for homes to be ready for possession after the structure is complete. There have been cases of developers, who have received over 80 per cent of the payment, delaying work on these buildings for over two years. This has has been a cause of concern for buyers paying their equated monthly installments (EMIs) for the property.

Possession-linked plans

Looking at the low success rate of CPLs, banks have now come up with possession-linked plans (PLPs) . As per PLPs, over 20 per cent of the loan amount is released when an apartment in India is booked, while the remaining 80 per cent is given to the developer after the possession is handed over to the buyer. Under PLPs, a developer is bound to finish the project on time to get the remaining 80 per cent of the payment.

Looking close

In both these plans, developers choose to offer discounts to those who book homes at the time of launch. Higher discounts are given to those who pay a higher down payment, as this helps developers to undertake the costs of construction. This is true especially in case of PLPs.

It is advisable to take closer look into the financial arrangements of PLPs. The Reserve Bank of India had earlier banned 80:20 schemes, which were similar to PLPs. Under a 80:20 scheme, the advance payment of 20 per cent of the total amount had to be paid by buyers, while the rest had to be paid on possession. This scheme was banned to ensure the financial health of banks, developers and home buyers.