Pay more for dream home because of escalation clauses
For example, if you book a property worth Rs 30 lac, you may find the price up to Rs 40-45 lac at the time of possession. Typically, the cost of construction is 15-20 % of the property price in bigger cities and up to 40 % in smaller ones. This can easily push your cost up by 25-30 %, say real estate experts.
With property developers increasingly putting cost escalation clauses in home sales agreements, buyers of under-construction properties may find themselves stuck in the provisional, with the price rise for the purchase exceeding the loan taken before possession. The escalation clause is being indexed to inflation and, in turn, the cost of construction.
The country’s Prime developer, DLF], has already included a rise in the agreement for its New Gurgoan projects. Many others may follow. It is not that builders do not raise prices without an escalation clause -— they can increase the carpet area of the property due to extra floor space index (FSI) and charge for it. But, this would mostly be a couple of lacs more.
Bankers aren’t sure if they can do much to help you. “Once a loan has been sanctioned, it is fixed for the next 15-20 years. It cannot be raised if the builder has asked for extra money. So, raising the loan (amount) at the time of property possession is out of the question,” Bank of Baroda Home loan.
An option is simply for the buyer to save or part-pay more. That means for a property of Rs 50 lac home loan in Delhi, you will need to be prepared with Rs 25 lac on you (Rs 10 lac as margin, Rs 2.5-3 lac for stamp duty and Rs 10-12 lac for cost escalation). You could opt to provide more security or borrow against investments, to increase your eligibility. Banks accept life insurance/endowment policies, shares/mutual funds and the like.
However, property buyers are invariably over-leveraged; there is no scope to provide them a higher loan. In most cases, 40-45 % of an individual’s salary is already being used to repay a home loan. A top-up loan can come to your rescue only if you’ve started repaying the original loan, as your repayment pattern plays an important role in granting a top-up. Importantly, both loans put together can go up to 80 % of the property price. An option, then, only if you borrowed less the first time.
IDBI home loan, “Lastly, we can work with the developers and look at capping the escalation cost. It may be difficult to lend when there is no limit set.”
Bankers say they’ve only come across cases where developers raise rates because they provide extra FSI. And, mostly property owners bridge the fund gap. However, now banks will have to take time to understand how it works and accordingly plan the funding part.
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