Banks usually release 80 to 90% of the total Value of property as Home Loan, provided, the loanee's credit worthiness is equal to or above the value of the property. The balance amount of money that one has to bring-in, is called Margin Money. Bank will insist to see proof that Margin Money has been paid to the builder before loan is disbursed.
When a person takes only a lower, partial amount as loan, builder may insist that the amount not taken by loan, be paid upfront to him, in full to avoid possible payment defaults.
Lets look at what happens if Builder has agreed that upfront payment of self funded amount, is not necessary.
2.0 Partial Home Loan
Its Partial Loan, when you take a smaller amount as loan, compared to cost of an apartment.
Before deciding to go for partial loan, ensure that the balance amount is absolutely available with you, to be released as and when required.
During construction phase, delay in payment will be subject to large interest. This is due to the fact that the contractor would have bought materials in advance and he need to be compensated timely. Any delay will require contractor to raise short term funds at high interest rates and the interest and cost associated with funding such shortfall, will become bearable by the defaulter.
Once you go for Bank Loan, Banks make prompt payments and you do not need to worry about default interest payability. An individual, if he decides to fund by self, fully or partly, has to ensure that funds are absolutely available as per payment schedule, since interest costs in case of payment delays, could be heavy.
3.0 An Example
If an Apartment costs 35L and you take only 25L loan, the bank will release each installment ONLY after You have paid the Builder, respective installment of Money that You need to pay directly. The receipt from builder is to be given to Bank Before it releases.
In case of partial loan, if Bank do not release installment since you have delayed your portion to the builder, then interest will be applied to the entire due amount including due from bank and this interest will have to be borne by the Buyer.
Cost of Apartment: 35 L
Credit Limit Approval by Bank say- 38L
Amount taken by Loan -25L
Balance to be funded by self - 10L [Bank may seek clarification how and from where you propose to bring this part and it has to be satisfied]
Funded as Margin Money. Say 10% of property Value - 3.5L
Balance to be funded by self during construction- 6.5L
Bank Payment Schedule (Conceptual )
1st Installment - 25% = 6.25L - Bank Will pay 5L Only if Buyer has paid Builder 25% of 6.5L .(Self funding Portion) first. Receipt for this has to be given to bank for bank to release 6.25L.
Second - 25% =6.25L (Buyer has to pay 25% of 6.5L before Bank Pays 6.25L installment)
Third - 20% = 5L (Buyer has to pay 20% of 6.5L before Bank Pays 5L installment)
4th Installment -20% = 5L (Buyer has to pay 20% of 6.5L before Bank Pays 5L installment)
Final Installment 10% = 2.5L (Buyer has to pay balance of 6.5L before Bank Pays 2.5L installment)
In the above example, the buyer has to pay 1.3L as his portion of third installment. If he delays for 3 months, bank will hold its portion of 5L. Total amount due is 6.3L and default interest payable to the Builder, on 6.3L could be as high as 20% ie Rs.31,500 for just 3 months.
Before going for Partial Home loan, ensure that funding arrangement for the balance amount is firmly in place, to prevent wasting money, on default interest payment.