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Construction Linked Installment Plan

Construction Linked Installment Plan

Ratings: (0)|Views: 671 |Likes:
Published by Navneet
One of my friends had shortlisted his dream Home but was confused which payment plan to follow. There are usually three payment Plans.
Upfront payment: You pay the builder around 95% of cost upfront with some discount & rest at the time of possession.
Construction Linked Installment Plan: You pay certain % of cost as the construction progresses.
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? & if he does how much would he gain?
In this post I would try to answer these questions.
First Lets list down the reasons & risks which are well known for avoiding upfront payment.
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.
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
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


Total Cost:
Plan A: Rs. 2,488,153
Plan B: Rs. 2,586,840
Actual Gain if you take plan A: Rs. 98686 – 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
2,678,215
2,512,532
165,684
6.59%
3
2,586,840
2,488,153
98,686
3.97%
4
2,484,910
2,467,013
17,897
0.73%
5
2,405,382
2,447,120
(41,738)
-1.71%
6
2,330,237
2,431,243
(101,006)
-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%
2,644,645
2,508,162
136,483
5.44%
9%
2,615,459
2,498,052
117,407
4.70%
10%
2,586,840
2,488,153
98,686
3.97%
11%
2,558,775
2,478,460
80,315
3.24%
12%
2,531,251
2,468,966
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%
2,586,840
2,586,310
530
0.02%
10%
2,586,840
2,537,232
49,608
1.96%
12%
2,586,840
2,488,153
98,686
3.97%
15%
2,586,840
2,414,536
172,304
7.14%
20%
2,586,840
2,291,841
294,999
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 Instal
One of my friends had shortlisted his dream Home but was confused which payment plan to follow. There are usually three payment Plans.
Upfront payment: You pay the builder around 95% of cost upfront with some discount & rest at the time of possession.
Construction Linked Installment Plan: You pay certain % of cost as the construction progresses.
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? & if he does how much would he gain?
In this post I would try to answer these questions.
First Lets list down the reasons & risks which are well known for avoiding upfront payment.
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.
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
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


Total Cost:
Plan A: Rs. 2,488,153
Plan B: Rs. 2,586,840
Actual Gain if you take plan A: Rs. 98686 – 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
2,678,215
2,512,532
165,684
6.59%
3
2,586,840
2,488,153
98,686
3.97%
4
2,484,910
2,467,013
17,897
0.73%
5
2,405,382
2,447,120
(41,738)
-1.71%
6
2,330,237
2,431,243
(101,006)
-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%
2,644,645
2,508,162
136,483
5.44%
9%
2,615,459
2,498,052
117,407
4.70%
10%
2,586,840
2,488,153
98,686
3.97%
11%
2,558,775
2,478,460
80,315
3.24%
12%
2,531,251
2,468,966
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%
2,586,840
2,586,310
530
0.02%
10%
2,586,840
2,537,232
49,608
1.96%
12%
2,586,840
2,488,153
98,686
3.97%
15%
2,586,840
2,414,536
172,304
7.14%
20%
2,586,840
2,291,841
294,999
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 Instal

More info:

Published by: Navneet on Feb 14, 2010
Copyright:Attribution Non-commercial

Availability:

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07/27/2010

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Basic Sales Price (BSP) 2,523,500Additional Cost 150,000EDC/IDC 226,800Annual Opportunity Cost10%Upfront Payment Discount12%Possession Period (Months) 36Months after Booking when Construction Begins 3Number of Installments after Construction Begins 11
Effective Upfront BSP 2,220,680Opportunity Cost /Month0.83%Gains by following Upfront Payment 96,084
PLAN A:-Down Payment PlanAt the time of Booking / AllotmentRs. 2.5 lac.Within 45 days of BookingWith in 60 Days of Booking / AllotmentOn Offer of Possession TotalPLAN B:-At the time of Booking / AllotmentRs. 2.5 lac.Within 45 Days of Booking / Allotment20% including booking amtOn start of excavation10% BSPOn Casting of Stilt Roof10% BSP + 50% EDC & IDCOn Casting of First Floor Roof10% BSPOn Casting of Third Floor Roof10% BSPOn Casting of Sixth Floor Roof On Casting of Ninth Floor Roof7.5% of BSPOn Completion of RCC Structure5% of BSPOn Completion of Internal Plaster5% of BSPOn Completion of External Plaster5% of BSP20% including bookingAmount75% of BSP + 50%Additional Charges5% of BSP + 50% AdditionalCharges+ Other Charges (if any)Interest Free ConstructionLinked Installment Plan.7.5% of BSP+50% AdditionalCharges + 100% PLC (if any)
 
On Completion of Flooring5% of BSP + 50% EDC & IDCOn offer of Possession Total5% of BSP + 50% AdditionalCharges+ Other Charges (if any)
 
3.9%
Payments Made0 250,000 250,0001.5 194,136 191,7342 1,853,910 1,823,39336 299,434 222,1022,487,230Payments Made0 250,000 250,0001.5 254,700 251,5493 252,350 246,1456 365,750 347,11910 252,350 233,02613 252,350 226,73116 264,263 231,02020 189,263 160,98523 126,175 104,42426 126,175 101,60329 126,175 98,858# of Months toPaymentPresent Value of Payment# of Months toPaymentPresent Value of Payment

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