Home loans, under-construction projects, and builder disputes

This page covers residential housing loans granted to individual homebuyers, co-borrowers, and families by commercial banks, housing finance companies (HFCs), and non-banking financial companies (NBFCs).

It focuses on the legal relationship between the buyer, the financing institution, and the developer under bipartite and tripartite home loan agreements. It covers title due diligence, RERA compliance checks, staged disbursal mechanics, and default remedies under the Insolvency and Bankruptcy Code, 2016.

Housing finance in India is governed by RBI housing finance regulations, the Real Estate (Regulation and Development) Act, 2016 (RERA), and contract law.

Under Section 18 of RERA, if a promoter fails to complete or give possession of an apartment in accordance with the terms of the agreement for sale by the agreed date, the homebuyer has an absolute choice:

1. Exit the project: Demand the return of all amounts paid, alongside interest at the state RERA prescribed rate (typically State Bank of India's highest Marginal Cost of Funds Based Lending Rate [MCLR] plus 2%), and full compensation.
2. Remain in the project: Claim monthly interest for every month of delay until the developer hands over valid possession with an Occupancy Certificate (OC).

In tripartite loan arrangements, the borrower, bank, and developer sign an agreement where the bank disburses funds directly to the developer's RERA-designated escrow account (70% account under Section 4(2)(l)(D)) as construction progresses. The Supreme Court in Newtech Promoters and Developers v. State of U.P. settled that RERA applies retroactively to all projects that were ongoing when the Act took effect, affirming the homebuyer's right to refunds. Furthermore, in Pioneer Urban Land and Infrastructure v. Union of India, the Supreme Court upheld amendments recognizing allottees as financial creditors under Section 5(8)(f) of the Insolvency and Bankruptcy Code (IBC).

Before sanctioning a housing loan, the lender's empaneled advocate examines title documents spanning 30 years to confirm that the seller or developer holds clear, marketable title free from encumbrances. The bank checks municipal building sanctions, commencement certificates (CC), layout approvals, and verified RERA project registration numbers.

For under-construction properties, the loan is disbursed in tranches aligned with construction progress (e.g., 10% on foundation, 15% on first slab, 15% on brickwork). During construction, you pay "pre-EMI" interest—which is simple interest calculated strictly on the amount disbursed to date. Once the developer obtains an Occupancy Certificate (OC) from the local civic body, the final loan tranche is released, the conveyance deed is registered, and regular EMI repayment (principal plus interest) begins.

The most devastating breakdown occurs when a builder halts construction midway. Homebuyers find themselves trapped: paying monthly rent for existing accommodation while simultaneously servicing pre-EMI interest to the bank for an apartment that may not be delivered for years.

In older "subvention schemes" (80:20 or 10:90 schemes), developers agreed to pay the pre-EMI interest directly to the bank on the buyer's behalf until possession. When builders stopped paying interest, banks immediately debited the buyers or declared them defaulters, degrading their CIBIL scores. The RBI prohibited banks from offering upfront-disbursal subvention schemes, requiring that loan disbursements be strictly linked to verified stages of construction.

Another critical risk involves project deviations. If a builder constructs additional unauthorized floors or deviates from approved municipal plans, civic authorities will withhold the Occupancy Certificate (OC). Without an OC, the building lacks legal water and electricity connections, and the bank cannot release final disbursements or obtain valid mortgage security.

If your under-construction housing project is stalled or the developer has breached completion deadlines:

1. Never stop paying your bank EMIs unilaterally. From a contractual perspective, your loan agreement with the bank is an independent obligation. Unilateral stoppage results in your account being marked as an NPA and reported to credit bureaus.
2. File a formal complaint before the State Real Estate Regulatory Authority (RERA) under Section 18, seeking either an order for refund with statutory interest or monthly delay compensation.
3. If the developer offered a subvention scheme and defaulted on pre-EMI payments, apply for interim relief before the State RERA or High Court seeking an order restraining the bank from taking coercive recovery action against you or reporting negative credit marks during the builder's default.
4. If a group of allottees (meeting the threshold of 100 allottees or 10% of total allottees in the project) faces developer insolvency, you can file an application under Section 7 of the IBC to initiate corporate insolvency resolution against the developer company.
5. In your tax filings, remember that interest paid during the under-construction period cannot be claimed immediately. You must accumulate pre-construction interest and claim it in five equal annual instalments beginning from the financial year in which possession or completion is obtained, within the overall ₹2 lakh cap under Section 24(b).

In Newtech Promoters, the Supreme Court rejected builders' arguments that RERA could not apply to projects approved before the Act, holding that prospective application to ongoing defaults is essential to protect homebuyers from endless delays. In Pioneer Urban Land, the court affirmed that the money advanced by allottees has the commercial effect of a borrowing, giving buyers the same statutory rights as banks in insolvency proceedings.

Can I stop paying my home loan EMIs if the builder stops construction? No. Your loan contract with the bank is legally independent of your purchase agreement with the builder. Stopping EMIs unilaterally leads to loan default, legal notices, and damage to your CIBIL score. You must seek judicial relief through RERA or the High Court to halt deductions legally [1][2].

What is the difference between pre-EMI and full EMI? Pre-EMI is simple interest charged on the actual amount disbursed by the bank during the under-construction phase. Full EMI (principal repayment plus interest) begins only after the entire loan is disbursed, typically upon completion and handover of possession.

Can I get my money back from a builder who delayed the project? Yes. Under Section 18 of RERA, 2016, if the promoter fails to deliver possession by the agreed date, you have an absolute right to withdraw from the project and receive a full refund of all amounts paid, along with statutory interest prescribed by your state RERA [1][2].

What is an Occupancy Certificate (OC) and why does the bank need it? An Occupancy Certificate is issued by the municipal planning authority certifying that the building has been constructed according to approved plans and is fit for human habitation. Banks require the OC before releasing final disbursements and closing out construction files.

How is under-construction home loan interest treated for income tax? Interest paid during the pre-construction period cannot be deducted in the years it is paid. It must be totalled and claimed in five equal annual instalments starting from the financial year in which construction is completed and possession is acquired, subject to the annual ₹2 lakh ceiling under Section 24(b).

• Loan against property — understanding equity release on existing property.
• The tax angle — complete rules on Section 24(b) and pre-construction interest.
• Notices and proceedings — SARFAESI enforcement and DRT procedures.
• Complaints and redressal — filing complaints before RERA and the Banking Ombudsman.