What is a Construction Linked Payment Plan (CLP)?

Acquiring the money needed for the construction of a housing project is no small ordeal. Home loan EMIs take quite a big part out of a person’s monthly income and this, of course, affects their finances. Choosing a solid payment plan is important when you set out to do this so that your budget is not affected badly.

There are many payment plans out there, but here we will be discussing one in specific: CLP or Construction Linked Payment.

Construction Linked Payment (CLP)

In CLP, the bank gives out money in installments to the builder on the buyer’s behalf. Each instalment is set for when the predetermined construction stages are completed one by one. The distribution of the loan is structured in such a way that around 95% of the total price is paid to the developer by the time the last slab is laid. The buyer starts to repay the loan to the bank only once the builder completes the project and the handover is done. However, pre-EMIs are to be paid during the period of construction, right from the time of the first disbursal from the bank.

An example of a CLP is given below:

A housing project costs 50 Lakhs. 10% is paid by the bank to the developer at the time of booking and 20% within 45 days. Additionally, 10% is paid whenever a construction milestone (laying the plinth or foundation, first-floor slab, second-floor slab, etc.) is completed. 15% is paid when the final slab is laid. At this stage, 95% of the total cost of the building is paid, which is 45 Lakhs. The remaining 5% is demanded by the builder at the time of possession.

The Advantages and Disadvantages of Opting for CLP

The advantages of CLP include the following

The financial burden on the buyer is reduced substantially because they get the time to collect the money required without it affecting the progress of construction.
The buyer can avail of tax benefits on pre-EMI interest, as well as on the principal after the completion of the project.
The buyer need not worry about losing money because the plan ensures the accomplishment of every stage before proceeding with further payments.

CLP benefits the developers too. The superstructure is the fastest and easiest part of the construction process. By the time the skeleton of the building is erected, the builder would possess nearly 95% of the total cost of the project. The developers, therefore, enjoy the regular, assured cash flow. They are also free from the liabilities of having such a huge amount of money with them because they do not receive it in their name, but in the name of the buyer. Such amounts are hard to acquire through other means in the market. They can use all the extra money to invest in other assets or launch other construction projects.

There are disadvantages to CLP too

This plan is not suitable for buyers who are looking for quick possession of the property. The construction takes time with CLP.
The buyer is burdened with pre-EMI, which is the interest for the loan, along with the rent amount for their current living.
As the builders are paid around 95% of the total cost of the project before its very final stages (interiors and finishing), they feel encouraged to delay the handover. There have been instances where a 5-6-month stage was delayed for years. Unless the buyers safeguard themselves from this, they have no protection from delays.
Oftentimes, other payment plans can prove to be less risky or even cheaper in total, compared to CLP.
Since payment is done in small parts, the buyer is not likely to receive any discounts on the price of the building as compared to a traditional down payment.

What are My Other Payment Plan Options?

Traditional Down Payment Plan

Traditional Down Payment Plans require you to pay 10-15% of the price of the property at the time of booking and 80-90% within a given period. The remaining amount usually consists of the extra charges incurred, such as registration fees, stamp duty etc. This plan can get you discounts as high as 8-9% on the property. The downside is that a huge sum is paid to the developer at a very early stage, putting the buyer at risk of delays, breaks or even abandonment.

Time Linked Payment Plan

In Time Linked Plan, the payment is done in installments as per a pre-set timetable by the developer, irrespective of the progress of construction. While there is no risk of losing a huge chunk of money altogether as possible in a traditional down payment, the buyer has to keep paying the builder even if there are delays.

Flexi Payment Plan

It is a mix of traditional down payment and time-linked payment plans. In the Flexi Payment Plan, 50% of the total amount is paid by the time the construction starts, and the remaining 50% is paid during the construction process.

Long Story Short

Construction Linked Payment Plan is a work in progress. Various experts suggest that the plan should be modified in such a way that at least 40% of the total cost of the project remains to be paid after the completion of the superstructure. While CLP can be an excellent option for many buyers out there, it is not advised to blindly opt for it without considering the various options available.