• 26th Jul 2016
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Subvention Schemes: All that glitters may not be gold

Subvention Schemes: All that glitters may not be gold

With realty sales especially in the residential segment still to pick up and unsold inventories piling up, developers have been forced to come up with innovative schemes to attract customers to their projects.

Subvention schemes are one of the most popular tools employed by developers in tandem with banks and NBFCs to revive sales by offering their customers lucrative buy now, pay later deals at their ongoing projects.

What is a subvention scheme?
The most commonly used subvention scheme is one wherein a home buyer buys an under-construction property, but does not have to pay the EMIs for a fixed period or until such time he/she gets possession of the property.

Buyers opting to buy realty under a subvention scheme announced by a developer can get a home loan from participating bank, but are not burdened with paying both the EMIs (for their home loan) and rent (for their current accommodation), since the developer bears the interest burden on behalf of the buyer until possession or a pre-specified period.

Also popularly referred to as the 80:20 scheme, a buyer only has pay approx 20% of the total cost of the property upfront with the balance payable at the time of possession.

A popular option among mid-income and salaried buyers, developers have been quick to realize the merits of such customer-friendly schemes and launched them across cities like Mumbai, Delhi, NCR, Bangalore and Chennai to boost sales at their under-construction projects.
  
Leading public and private sector banks have also been quick to jump on the bandwagon in their bid to increase their tally of home loan customers. However given the risk associated, they are careful to fund only select projects from reputed developers with an excellent track record, thereby raising the credibility of the project and the developer even further.

How the developer benefits:

  • Developers get access to much-needed, cheaper funds at a substantially lower rate of interest.
  • The funding comes in the form of home loans which are a lot cheaper than commercial loans.
  • Developers also get to enjoy extra credibility by associating with leading banks for such schemes.
  • It ensures a much larger pool of customers for their projects, helps reduce unsold inventory and boosts sales.

What’s in it for the Buyer?

Advantages:
  • The journey to owning his/her dream home is a lot easier since they need to pay only about 20% of the total cost upfront.
  • Since developers have tie-ups with banks it ensures easy access to home loans.
  • A buyer is also not burdened with paying both the EMIs and rent during the construction period.
  • He/She also has the option of investing the money saving from not having to pay the EMIs into instruments like FDs and then pay the bank, thereby lowering the debt.        
  • They can also enjoy the benefits of price appreciation during the construction period.

Risks:
  • Ensure the EMI-free period is valid till time of possession, lest you end up paying both EMIs and rent if the project gets delayed.
  • Make sure the developer does not default on his EMI payments made on your behalf, in which case the bank will hold you (the customer) directly responsible, also affecting your CIBIL score in the process. 
  • The cost of the property will be higher since the developer will include the interest component of the EMIs borne by him (on your behalf) in the final cost paid by you.
  • Double check the property documents to ensure it’s not a disputed property in which case you will need to get your money back from the bank.


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