We’ve all heard and read about easy installment plans and sometimes the option of making balloon payments, in most real estate advertisements. While installments are the actual cost of property (plus interest) evenly divided over a period of time (such as 2-3 years etc), balloon payments are a bit different. In some cases people would think these are an essential feature, while most believe that for high net worthy customers, this could be a great way of scheduling their payments. Besides the real estate sector, balloon payments are used for any repayment of loan (automobile, mortgage etc). As these are more common in the real estate sector, we will explore balloon payments in detail and underline their significance for realty.
WHAT ARE BALLOON PAYMENTS?
A balloon payment is when two or more payments or installments are paid together. It is a feature that is most commonly used in mortgage, auto loans, and business loans. It is collected by the loaner from the loanee during the loan installment period. However, when balloon payments are made, this does not mean that the loanee lets go off the monthly instalment plan, rather it is simply an additional payment that is incurred by the loanee.
When you have a loan to repay, balloon payments are a great way of paying off the debt in the easiest way possible during a smaller time span. For most people on a fixed salary, this could allow for better repayment planning and a chance to buy property without applying for a loan, and paying accumulated interest.
In Pakistan, balloon payments are typically made in the real estate sector. Let’s explore balloon payments in the real estate sector.
BALLOON PAYMENTS IN REAL ESTATE SECTOR
In the real estate sector, developers disburse the total cost of the property into monthly installment plans, spanning 1-2 years. At the conclusion of the installment period, all buyers have to pay a balloon payment which is a lump sum amount consisting of development charges, arrears, etc.
The developers collect development charges in addition to the installments which helps them get utility connections installed, paving and carpeting roads, installing street lights and signs, and developing the commercial areas of a housing society. This is similar for apartment complexes as well.
During the installment period, the balloon payments can be taken after every quarter, and is typically more than two installments combined. Essentially, the purpose of the installment plan is to break down the overall price of the property and evenly spread it over the duration of the installment period, leading up to possession.
For home buyers, balloon payments are considered easier to pay off as compared to mortgage payments which accrue interest as well. If you are paying your installments through mortgage, then balloon payments are considered to be more loanee-friendly as these are charged with a smaller percentage of interest.
Moreover, balloon payments free up cash for the developers to carry out their development tasks easily. This way, the developers are able to decide how they should allocate their money throughout the construction span.
Therefore, balloon payments have an integral role in attracting buyers, the kind of buyers, and determining in which way the property market will grow.
PROPERTY & BALLOON PAYMENTS
Balloon payments are an essential part of the property market. However, this is done in combination with a large number of factors, especially with considerations to the country’s economy.
Typically, in Pakistan’s real estate market, a large number of projects would have installment plans spanning not more than 3 years. However, owing to market fluctuations and economic conditions, housing projects launched during the last two years have introduced much longer installment plans spanning more than four years.
As the total cost of property is spread over a much longer period of time, the monthly instalments are significantly smaller in size and so are the balloon payments. This shift in payment plans has thus allowed a larger number of people to buy their properties. The same feature is replicated for Naya Pakistan Housing Program (NPHP), as property becomes affordable to many more with a longer payment plan.
What primarily benefits people with longer payment plans is the option of saving up for a balloon payment, while paying a minimum amount on a monthly basis. In some cases, the monthly installment is lower than the rent amount.
On top of this, most developers have allowed possession after half of the installments have been paid. This allows people to keep paying installments while they move on. This way, all genuine buyers have an opportunity to build their dream home while paying a minimum amount .
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