Introduction: The Emotional Bias Towards Ready-to-Move Homes
When it comes to buying a home, emotions often cloud financial logic. The idea of paying rent while your house is still under construction feels like throwing money away. So, many buyers opt for ready-to-move-in properties, believing they are making a financially safer choice.
However, this popular belief ignores one crucial aspect: the total cost of ownership over the long term. Often, ready-to-move homes come with a significantly higher price tag. In fact, buyers might end up paying over ₹14 lakh extra just to avoid paying rent during the construction period.
This article will help you understand why under-construction homes, combined with smart financial planning such as phase-wise loan disbursement, can be a better deal — even after factoring in rent payments during construction.
Understanding the Cost Components of Ready-to-Move vs Under-Construction Homes
To make an apples-to-apples comparison, let's break down the costs involved in buying a ready-to-move home versus an under-construction property.
1. Ready-to-Move Home
- Price: ₹60 lakh
- Down Payment: 20% = ₹12 lakh
- Loan Amount: ₹48 lakh
- EMI: ₹36,908 for 30 years (assuming 8.5% interest rate)
- Total Cost: Approximately ₹1.45 crore over 30 years
2. Under-Construction Home
- Price: ₹50 lakh
- Down Payment: 10% = ₹5 lakh
- Loan Amount: ₹45 lakh disbursed in 6 phases over 3 years
- Rent During Construction: ₹15,000 per month, increasing 5% annually
- EMI: ₹35,479 for 27 years (starting after 3 years, assuming same interest rate)
- Total Cost: Approximately ₹1.30 crore over 30 years
At first glance, the ready-to-move home seems convenient but costs ₹14 lakh more in total over the loan tenure. This difference can be attributed to the lower base price of the under-construction home and the staggered loan disbursement reducing the EMI burden.
Phase-Wise Loan Disbursement: The Hidden Advantage
One of the biggest financial advantages of buying an under-construction property is the phase-wise loan disbursement. Unlike ready homes where the entire loan amount is disbursed upfront, under-construction loans are disbursed in stages aligned with construction milestones.
This means you start paying interest only on the amount disbursed, not on the entire loan upfront. As the loan amount increases gradually, your EMI burden also starts low and rises later, but the overall interest paid is lower because the loan principal is effectively smaller during the initial years.
This phase-wise disbursement acts like a natural EMI buffer, allowing you to manage your cash flows better and reduce the total interest outgo.
How Phase-wise Disbursement Works
Typically, the loan amount is released in 5-6 phases:
- Foundation completion
- First-floor slab
- Second-floor slab
- Roof slab
- Finishing work
- Possession
At each stage, the bank disburses a portion of the loan, and interest starts accruing only on that disbursed amount. This phased approach can significantly reduce your interest burden compared to a lump-sum disbursement.
Rent During Construction: Is It Really a Waste?
The main reason buyers shy away from under-construction properties is the fear of paying rent while also paying EMIs later. But let's analyze this with real numbers.
Assume you pay ₹15,000 per month as rent during the 3-year construction period. Also, assume rent increases by 5% annually, a conservative estimate based on average urban rent inflation.
Over 3 years, your rent payments would be approximately:
- Year 1: ₹15,000 × 12 = ₹1.8 lakh
- Year 2: ₹15,750 × 12 = ₹1.89 lakh
- Year 3: ₹16,537 × 12 = ₹1.98 lakh
Total rent paid in 3 years: ₹5.67 lakh
While this rent payment is an additional cost, it is offset by the lower price of the property and the reduced loan interest due to phase-wise disbursement.
Comparing Total Costs: Ready-to-Move vs Under-Construction
Let's summarize the financial comparison in a table for clarity:
| Parameter | Ready-to-Move Home | Under-Construction Home |
|---|---|---|
| Property Price | ₹60 lakh | ₹50 lakh |
| Down Payment | ₹12 lakh (20%) | ₹5 lakh (10%) |
| Loan Amount | ₹48 lakh | ₹45 lakh (disbursed in 6 phases) |
| EMI (Monthly) | ₹36,908 for 30 years | ₹35,479 for 27 years (starts after 3 years) |
| Rent During Construction | ₹0 | ₹15,000/month (increasing 5% annually) |
| Total Cost Over Loan Tenure | ₹1.45 crore | ₹1.30 crore |
| Cost Difference (Savings) | ₹14 lakh in favor of Under-Construction Home | |
Why Does This Difference Occur?
The ₹14 lakh saving is primarily due to:
- Lower Base Price: Under-construction properties are generally priced 10-20% lower than ready homes.
- Lower Down Payment: Builders typically require only 10% upfront for under-construction homes, easing initial cash flow.
- Phase-wise Loan Disbursement: Interest accrues only on disbursed amounts, reducing total interest paid.
- Rent Payments: Though rent adds to cost, its impact is outweighed by the above factors.
Real-World Example: Mumbai vs Pune Housing Market
Consider two similar apartments in Mumbai and Pune:
- Mumbai Ready-to-Move Flat: 1 BHK, ₹1.2 crore
- Pune Under-Construction Flat: 1 BHK, ₹1 crore
Despite the Mumbai flat being ready, the ₹20 lakh price difference is significant. If the buyer rents a similar apartment in Mumbai for ₹25,000 per month during construction, the total cost difference remains substantial even after accounting for rent.
This example highlights how location and market dynamics influence the decision but the principle of cost-saving via under-construction homes holds true.
Additional Financial Considerations
1. Inflation and Rent Escalation
Rent generally increases at 5-7% annually, which can raise your rental burden during construction. However, inflation also reduces the real value of EMIs over time, making future loan payments easier to manage.
2. Opportunity Cost of Down Payment
A lower down payment means you can invest the difference elsewhere, potentially earning returns that further offset costs.
3. Tax Benefits
Home loan interest and principal repayments offer tax deductions under sections 80C and 24(b) of the Income Tax Act, applicable to both ready and under-construction properties. However, the timing of these benefits may vary based on possession.
4. Risk Factors
Under-construction properties carry risks such as project delays, quality issues, or builder defaults. Therefore, it is crucial to buy from trustworthy developers with a good track record.
Using Technology to Make Informed Decisions
The LoanVsFD app is designed to help you input your specific details — property cost, loan tenure, interest rate, rent, and phase-wise loan disbursement schedule — to calculate your exact cost comparison.
This personalized approach removes guesswork and emotional bias, allowing you to see the true financial impact of your choices.
Summary: Should You Choose Ready-to-Move or Under-Construction?
- Ready-to-Move Homes: Offer convenience and immediate possession but come at a higher price and larger upfront loan burden.
- Under-Construction Homes: Require patience and rent payments during construction but can save you significant money through lower prices and phase-wise loan disbursement.
- Rent During Construction: While it feels like a burden, it is often outweighed by the overall savings.
- Trustworthiness of Builder: Always verify the credibility and track record of the developer before opting for under-construction properties.
- Use Data and Tools: Leverage apps like LoanVsFD to input your unique case and get a clear financial picture.
Final Thoughts: Let the Numbers, Not Assumptions, Guide You
In the emotional journey of buying a home, it is easy to get swayed by the fear of paying rent or the allure of immediate possession. However, by carefully analyzing the numbers and understanding the financial mechanics of loans and rent, you can make a smarter decision that saves you lakhs of rupees.
Remember, ₹14 lakh is not a small amount — it could be your child's education fund, a retirement corpus, or a second investment property. Don't let assumptions or social pressure force you into a costlier choice.
Use the LoanVsFD app to calculate your own scenario with phase-wise loan inputs, rent inflation, and EMI schedules. Empower yourself with knowledge and make your home buying journey financially rewarding.
Ready to crunch your numbers? Download the LoanVsFD App now and make informed decisions!