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Buying a home is the dream that everyone cherishes. However, the decision becomes challenging as it is one of the most significant financial investments that a person has to make.
As the financial commitment is huge, most people have to rely on banks for support in buying their dream home. The situation becomes even more complex if the property is under construction. That is because your monthly financial outflow includes rental and pre-EMI (In case you are staying on rental). The real estate developer offers innovative schemes tailor-made for such situations to address this issue. These schemes are popularly known as subvention schemes or 20:80 schemes.
Let’s take a look at the features of the subvention scheme:
- In a subvention scheme, the buyer doesn’t have to pay any amount in interest until an agreed period, which is mentioned under the contract terms.
- This safeguards the hassle of making the EMI payment even before the possession.
- It Makes buying a bit easy as it hurts your pocket a little less.
Types of subvention schemes?
There are two types of subvention schemes-Builder subvention and Bank subvention. Let’s take a look at each of them.
Builder Subvention
Builder subvention is a flexible payment plan offered rarely by builders. This plan is perfect for a home buyer as they have to pay only a part of the entire consultation, which is 10% to 30% initially, and the rest is at the time of possession or the discussed period mentioned as per the agreement. Home buyers do not need to take a loan in between. However, when possession of property comes in, they can apply for a home loan and avail of the benefit at the time of possession. Only reputed builders are known to offer these schemes.
Bank Subvention
A subvention Scheme is nothing but a flexible payment system in a bid to attract. According to the scheme, only a part of the total consideration (which can be 10%-30%) of the total cost has to be paid by the homebuyers initially. At the same time, the other part is funded by self (via financial institute); The same would be paid to the developer according to the construction schedule. However, in the interim time, the pre-EMI cost will be done by the builder.
How does it function, and how is it different from other payment schemes?
- There are three parties involved in the subvention scheme-the home-buyer, the banker, and the developer.
- The buyer books the property by paying 10-30% money upfront.
- According to the buyer-seller agreement, the developer bears the interest cost till possession or for a pre-determined period.
- Bearing the interest cost motivates the developer because it has an incentive to finish the project on time. With delays becoming so common, this also becomes an added benefit for buyers
What is the advantage to developers?
For a developer, liquidity is significant. The subvention scheme allows the developer to have continued access to funds at a low rate. Another advantage of the subvention scheme for developers is that it stokes consumer sentiment, and it is easier for the developers to convince potential buyers.
What is the advantage to the buyer?
A well-designed financing plan for house purchase is something every buyer desires. The sky-high prices of houses, construction delays, and difficulty getting a home loan make it difficult for a buyer to make the final purchase decision.
Subvention schemes are a blessing for buyers who do not want to commit a hefty sum upfront, and it allows the buyer to accumulate more money without paying the interest. Moreover, as the buyer only pays 10-20% till possession, the return on investment can turn out to be better.
What are the problems with subvention schemes?
Though the subvention scheme looks good on the surface, it has inherent loopholes. Also, the “liability shifting clause” falls on you if the builder doesn’t pay the EMIs on time (in bank subvention). If you stay on rent, you could face a dual financial burden of rent and EMI, and the default could impact your credit score.
Not just this, the subvention scheme has been subjected to several fraudulent practices as it began to get misused. In 2019, the National Housing Board (“NHB”) discouraged housing finance companies from lending money to developers under the interest subvention scheme. According to NHB, the subvention scheme led to speculative demand for apartments. As a result, the real property value was not considered until the building was completed. The move by NHB drew mixed reactions from the real estate community in India.
In 2021, NITI Aayog suggested the reinstatement of the interest rate subvention scheme to revive the real estate demand in India after the COVID-19 crisis.
What do you need to see before opting for a subvention scheme?
Interest subvention schemes have witnessed a lot of unethical activities in the past. You don’t want to face any such hassle. Hence, you need to be extra cautious.
There are several pointers that you need to ensure before committing to any subvention scheme:
Check the financial strength of the developer
The developer will be able to honor the dues if he has enough finances, so double-check about it with them. If the developer is a publicly listed company, you can access its financial records from its website. However, if it is a private company, you may have to ask the builder to share proof of its financial situation. Never opt for a subvention scheme without ensuring the developer’s financial stability; else, the burden of repayment might fall on you if he defaults.
Check the developer’s project delivery history
You could suffer endlessly if you have to face project delays. Hence, checking the delivery track record of the developer is critical. You need to pay special attention to any delay. Try to find out if the reason for the delay was genuine or a result of poor management skills.
Check if the developer has obtained various licenses
A subvention scheme is an excellent arrangement for new homebuyers. However, you need to ensure that there are no ambiguous or hidden clauses in the document. At the same time, you also need to check if the developer has all the statutory licenses in place.
Read all the terms and conditions
No one cares about reading the entire loan agreement, but it’s highly essential. You must read all the terms and services; else, you could be in for a shock later. Particular interest must be paid to the clause regarding the timing of interest payment. Ideally, the interest must be paid till possession instead of 1 or 2 years.
What is the recourse that you can take?
Even after taking the utmost precaution, you can complain to the Real Estate Regulatory Authority (RERA) if you face any fraudulent issues regarding the interest rate subvention plan. The RERA has the power to redress these issues legally. According to the RERA Act provisions, if the builder is not giving timely possession, the homebuyer can file a Complaint.
Conclusion
Subvention schemes have several advantages for homebuyers and developers, but it is not without their drawbacks. If you wish to opt for the subvention scheme, it’s essential to be vigilant and be aware of the clear understanding of terms of the scheme. Also go always with CAT A builders which will keep the risk at minimum.
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