Home buyers guide: All you need to know about subvention scheme in real estate

Realty developers have to innovate schemes to attract property buyers, especially during festive periods. Subvention scheme is one of such idea.

Home buyers guide: All you need to know about subvention scheme in real estate
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Realty developers have to innovate schemes to attract property buyers, especially during festive periods. Subvention scheme is one of such idea. It basically refers to support, such as support provided to property buyers through financial schemes.

There are various subvention schemes in the market, and the idea of subvention itself keeps evolving.

Let’s take a deeper look at the concept.

How subvention scheme works

Subvention schemes are targeted at home buyers who avail home loans. There are three stakeholders in a subvention scheme: the buyer, the bank, and the builder. These three parties undergo an agreement wherein the buyer agrees to pay an initial booking amount or the down payment (which is a fraction of the total obligation), the bank agrees to pay the remaining balance to the builder (as a home loan), and the builder agrees to pay interest on the buyer’s home loan till the buyer receives possession or as per terms mentioned in their agreement. Banks release the payments to the developer according to the construction schedule.

Why subvention scheme was introduced

There were two reasons for such schemes: to reduce the buyer’s EMI burden till possession, and because banks often need a little more persuasion to finance projects than just the developer’s credentials.

Often home buyers suffer from delays in possession and have to pay interest on home loans and rent on their existing homes at the same time. This is a massive burden on the home buyer. But a subvention scheme offers an easier passage to home ownership by alleviating the interest burden till possession.

Benefits of the subvention scheme

Subvention schemes bring discipline to what developers do because banks ensure they get paid as per the extent of the construction work accomplished by developers. This gives developers the motivation to deliver possession in a timely manner, so that he could be relieved from paying the loan interest on the home buyer’s behalf. The risk to the buyer, in case the developer fails to deliver possession, is limited to loan amount disbursed as per the construction stage and not the complete loan amount as was in the case earlier.

Drawbacks of subvention scheme

Subvention scheme may relieve the home buyer’s loan interest burden, but it doesn’t come free. Developers add the interest to be paid by him to the property cost. This may sometimes mean that developers charge more than they actually pay as interest.

If developers fail to pay the agreed interest to the bank on time, it can negatively impact the credit score of the buyer in whose name the loan has been sanctioned. Once damaged, credit scores can severely limit the borrowing capacity of a loan seeker for a long term.

Home buyers are also at the mercy of builders who may divert funds to another project, leaving their projects in limbo.

In a tripartite agreement, developers may not make full disclosure of terms and conditions and merely provide cursory points to attract home buyer. Builders may reveal the fine print while drafting the agreement in a manner that favours them. It is very important that buyers enter an agreement after reading all terms and condition and only if there are safeguards for their interest.

Sometimes, builders advertise that there would be no EMI till possession, but in the agreement they mention a cut-off date which relates to a ‘projected possession’ date and hence even if the buyer does not get possession, his EMIs may start after that date. Hence, attention should be paid to the jugglery of words in the agreement.

Builders include any and all costs to the final price of the property. But while interest is paid to the bank on the buyer’s behalf, the buyer must determine whether he will get tax benefits from such an arrangement before entering into such scheme.

Final take

Subvention scheme is a well-crafted instrument often used by developers. Very soon RERA will come into the picture and many eyes-catching but deceptive schemes will vanish from the market. Till then, buyers are required to be cautious and consider subvention schemes after due diligence.

Buyers must verify the credibility of the developer, penalty clause for default in payment, penalty clause for delay in possession and a backup plan if something goes wrong. They must evaluate other payment schemes available in the market such as a simple construction-linked scheme or possession-linked scheme, and select the one that suits them best as per their paying capacity.

Subvention scheme could be very helpful for home buyers, especially first-time home buyers, provided the possession is delivered on time and there are no hidden clauses by developers out to deceive buyers.

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First published on: 10-09-2016 at 03:42:24 pm