Delay in getting possession of under-construction properties purchase have often proved very costly for home buyers, especially those who are buying a first home (to live in). What are the economics of a construction delay? How much will it set you back by? Do you have the financial resilience to handle a delay? These are some questions you should ask yourself when you are purchasing an under-construction property. This illustrates the key dynamics and what you can do to make sure you aren’t financially overreaching.

The slowdown in the last few years saw many people unable to move into their dream homes because of real estate project completion delays. The most impacted were:

  • Those who were buying homes to move into and at the time staying on rent.

  • Those who had financed the purchase by borrowing.


The fundamental problem centres around the buyer’s financial resilience in case of such delays. This has the ability to cause significant financial losses.

The economics of a delay are dictated by the following aspects.

Whether you are purchasing this property to live in and if you are currently renting.

This has been a huge source of hardship to many as the EMI or the pre EMI interest payment in addition to a rent can be really dire.

  • Consider a simple example of a family with a monthly take home salary of Rs. 100,000 which currently pays a rent of Rs. 35,000 and incurs additional household expenses of Rs. 40,000 per month. If the loan amount on the property (where the loan is completely disbursed) is Rs. 50 lakh with an EMI of approximately Rs. 50,000.

  • Because of a delay in possession of the property, the family which planned to move to an owned apartment and pay Rs. 50,000 EMI instead of Rs. 35,000 rent is now required to dig into its existing savings to pay an additional Rs. 25,000 every month to the bank.

  • For a family who planned to spend an additional Rs. 15,000 per month and build an asset, they are in a situation where they are depleting their savings corpus by Rs. 25,000 every month instead.



How you have structured your loan amount disbursal to the builder?

  • Normally, a house under construction requires the buyer to pay the builder in stages. As each stage is completed, a new tranche of payment is made by the buyer to the builder. When the buyer is funding the property purchase via a loan, the bank (lending to the buyer) releases these tranches of payments.

  • EMI’s do not start until the house is handed over to the buyer after completion. Until this time, the buyer pays the pre-EMI interest, which is the interest periodically accrued on the disbursed portion of the loan. If the property construction stops mid-way, the buyer is required to pay the pre-EMI interest on the disbursed portion of the loan.

  • However, buyers often get enticed by attractive schemes (with price discounts and freebies) to make the full payment upfront / have the entire loan amount disbursed upfront. This results in the builder receiving funding (usually) cheaper than the interest rate available to him.

  • The buyer pays the interest cost on these funds and the bank starts the EMI payments even while the property is under construction. The EMI on a 20 year loan at 10.5% interest for an amount of Rs. 50 lakh is approximately Rs. 50,000. The pre-EMI payment on a monthly basis on a partially disbursed loan (say Rs. 35 lakh) at 10.5% per annum would be Rs. 30,600.

  • So in case of a construction delay where the loan was disbursed only to the extent of Rs. 35 lakh, buyer would need to pay Rs. 30,000 per month in addition to all his expenses, thus saving him Rs. 20,000 in monthly outflows.


Typically, a construction delay results in the following:

·        Continuation of current rentals since the buyer needs a place to stay.

·        Payment of additional interest costs (pre-EMI) because of a delay.

·        Locking up your own funds in an unproductive asset.


3 steps forward

To mitigate the financial impact of a construction delay the following measures should be taken by a home seeker prior to embarking on a property purchase transaction.

  • Evaluate the track record of the builder. How they have handled delays in the past? Have they reneged on their commitments to past buyers in other projects where there has been a delay or have they honoured the penalty clauses? If the track record is poor, there is no reason to go ahead with the purchase, no matter what the discounts and the freebies are.

  • If your reason to go ahead is compelling enough, do your math, evaluate the amount you may have to spend additionally every month in case there is a delay in possession. Will you be financially stretched beyond your limit?

  • In case you see a potential stretch, set aside a corpus in an FD to tide over delays for a reasonable period (say a year) while you can evaluate alternatives. This buys you some time to handle the problem without defaulting on your payment commitments to the bank.