All you need to know about possession-linked payment plans

[ecis2016.org] In this article, we would discuss what possession-linked payment plans are and how it impacts home buyers

As the purchase of a home is often the biggest expense in a person’s life, real estate developers offer various choices to the buyers, vis-à-vis payments. Consequently, there are various ways in which a home buyer can make the payment for property purchases, including construction-linked payment plans (CLP) and possession-linked payment plan (PLP). These payment options have benefits for the buyers, as well as the developers, as the latter is able to raise advances from the buyer in case of under-construction properties. In case they borrow the same amount from a financial institution, they would have to pay significant interest on the credit, which would increase the cost of the project.

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In this article, we discuss what possession-linked payment plans are and how it impacts a home buyer.

What is a possession-linked payment plan?

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A possession-linked payment plan helps the buyer make the payment in two tranches, for the purchase of an under-construction property. While a certain portion of the property value is paid at the time of the booking, the remaining amount is to be paid, when the developer offers the possession of the unit.

While there could be varying ratios in which your builder can offer you such a deal, builders typically offer a 10:90 or 20:80 ratio, with respect to the payments. This means that the buyer can pay 10% or 20% of the property value at the time of booking and 90% or 80% of the value, when he gets its possession.

It is pertinent to note here that this scheme is only open for buyers who are using their own funds to make the purchase and there is no involvement of housing finance. This is the difference between a possession-linked payment plan and a standard 20:80 scheme.

In 20:80 schemes, the buyer pays the developer 20% of the property value, while the bank funds the remaining 80% amount, much before the construction is completed. The 20:80 scheme was eventually banned by the Reserve Bank of India (RBI) in 2013, because of a rise in the number of payment defaults and project delays.

Benefits of possession-linked payment plan

PLPs have gained a lot of ground in these challenging times, because the scheme gives the buyer the satisfaction of owning a property, despite the job insecurities, especially after the Coronavirus outbreak. Amid reports of several housing projects in major Indian cities being delayed by more than a decade, PLPs provide the buyer with a certain level of surety. Since only a certain percentage of the deal amount is paid, the buyer would not stand to lose a lot of money, even if the builder delays the project or goes insolvent.

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When compared to construction-linked or down payment plans, discounts available in PLPs are quite limited. As delays might make the whole prospect quite expensive for the builder, they price properties sold under the PLP higher, in order to offset losses. However, there are ways to get around this problem. Before revealing to the builder that you are interested in the PLP offer, try and find out how the unit is priced under the CLP. Once you get an idea about the property rate, inform the builder you are interested in the PLP. They would invariably tell you about the higher costs but then this also gives you scope to bargain and negotiate the deal in your favour.

Moreover, the overall cost for the buyer would still be low, as they will not need to pay any interest on the home loan. Buyers also get enough time to save the remaining amount in a bank and earn interest on fixed deposits or recurring deposits. In case they venture in the stock market, they may be able to generate even higher profits.

For developers, PLPs are another method to attract buyers and boost sales, at a time when demand for under-construction projects has taken a hit, amid large-scale project delays across India’s big cities.

Should you opt for a possession-linked payment plan?

Developers often try to sell payment schemes using varying names. Without understanding the nitty-gritty of the plan, do not sign up for any deals. Also, in spite of its obvious benefits, some payment options might not be useful for you, because of monetary issues. Pick a scheme that is best suited, given your circumstances and monetary standing. Since any profitable scheme is only as good as the party extending that offer, always pick a trusted builder, with an impeccable track record, while investing in an under-construction property.

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