What is a Construction Linked Payment Plan in Real Estate

November 22, 2023 . Real-Estate Industry . 10 min read

Real estate is a dynamic and ever-evolving sector, and within it, payment plans come in various forms. One such payment plan that has gained significant attention is the “Construction Linked Payment Plan.” If you’ve ever considered buying a property, the chances are that you’ve come across this term. In this blog, we will demystify construction linked payment plans, exploring what they are, their advantages and disadvantages, how they compare to other payment plans, how to manage finances when using them, and common pitfalls to avoid. So, let’s embark on a journey to understand this critical aspect of real estate.

Understanding Construction Linked Payment Plans

A construction linked payment plan, as the name suggests, is a cooperative arrangement involving 3 parties: the bank, the homebuyer, and the builder. In this setup, the bank disburses funds to the builder periodically on behalf of the homebuyer until the property is ready for possession. The bank’s payments are directly tied to the actual progress of the construction. For example, when a specific part of the project is completed or a concrete slab is laid, the bank releases the agreed-upon amount to the builder.

The primary advantage of this plan is that it offers a sense of security to buyers. Since you pay in proportion to the progress of the project, you reduce the financial risks associated with delays. However, it’s important to note that developers may charge a slightly higher price for properties sold under this plan to account for the flexibility and reduced risk they offer to buyers.

Advantages of Construction Linked Payment Plans:

• Lower Financial Risk:

CLP minimizes the risk of the buyer losing money if the project is abandoned or delayed. This is because it typically involves the bank releasing payments to the developer as the construction of the property progresses. It also helps to reduce the risk of the bank lending money to a developer who may not be able to complete the project.

• Steady Income for Developers:

CLPs provide developers with a steady stream of income, which can help to ensure that the construction project is completed on time and within budget. This is because developers are only paid when they reach certain construction milestones, such as the completion of the foundation or the roofing.

• Lower Interest Rates:

Lenders typically offer lower interest rates on CLP loans than on traditional home loans. This is because CLPs are considered to be less risky for lenders, as the buyer is less likely to default on the loan if the construction project is completed on time and within budget.

• Affordable Property Booking for Buyers:

Properties that are under construction are typically sold at lower prices than ready-to-move-in properties. This is because buyers are taking on more risk by purchasing a property that is not yet complete. CLP plans can make it possible for buyers to take advantage of these lower prices, while still minimizing their risk.

• Transparency and accountability:

CLP plans typically involve the buyer and developer signing a detailed agreement that outlines the payment schedule and construction milestones. This helps to ensure that the buyer is kept informed about the progress of the project and that the developer is held accountable for meeting the agreed-upon deadlines.

Disadvantages of Construction Linked Payment Plans:

• Potential for Delays:

While the plan mitigates the risk of financial loss, it doesn’t entirely eliminate the possibility of construction delays. Delays can still occur due to various reasons, such as regulatory approvals or unforeseen circumstances.

• Buyer’s Loan Interest Burden:

Some developers secure most of the project’s funding from financial institutions and extend construction timelines by 2-3 years. This leaves buyers without the property they paid for and forces them to pay extra loan interest during the delays.

Comparison with Other Payment Plans

• Down Payments:

In a down payment plan, you pay a significant portion of the property’s cost upfront. It’s a good option if you have substantial savings, but it’s riskier since you might have to wait for the property to be completed.

• Time-Bound Plans:

Time-bound plans require you to make payments at specified intervals, regardless of construction progress. They are less flexible but often more affordable initially.

Whereas, a construction linked payment plan spreads out the payments over construction milestones, providing high flexibility, and reducing the risk associated with paying for an unfinished property.

How to Manage Finances with Construction Linked Payment Plans

Managing your finances effectively with a construction linked payment plan is crucial. Here are some tips to help you navigate this payment scheme:

• Budget Wisely:

Create a detailed budget that considers not only the initial down payment but also the subsequent payments tied to construction milestones.

• Emergency Fund:

Maintain an emergency fund to handle unexpected expenses or construction delays.

• Regular Updates:

Stay in touch with the developer for updates on the construction progress, so you can plan your payments accordingly.

• Consult a Financial Advisor:

If you’re unsure about managing your finances with this plan, consider consulting a financial advisor for guidance.

Common Pitfalls to Avoid

While construction linked payment plans offer benefits, it’s essential to be aware of common pitfalls:

• Overextending Finances:

Avoid overcommitting to a property that might strain your finances.

• Incomplete Due Diligence:

Always research the developer’s track record and ensure all necessary legal clearances are in place.

• Ignoring the Fine Print:

Carefully read the agreement and understand the terms and conditions before signing.

Conclusion

In the ever-evolving world of real estate, understanding the intricacies of payment plans is crucial for making informed decisions. Construction linked payment plans offer a balance between financial security and flexibility, making them a popular choice for buyers of under-construction properties. By recognizing their advantages, being aware of potential drawbacks, and taking measures to manage your finances wisely, you can make the most of this payment plan. Remember, informed decision-making is the cornerstone of a successful real estate investment.