All you wanted to know about subvention scheme
The subvention scheme or the 20:80 scheme was introduced in an attempt to beat the slowdown in the real estate business. It has been part of residential real estate over the last few years, but is now emerging as a popular marketing tool as it asks the home buyers to pay only 20% upfront, while the remaining 80% is paid at the time of possession. Under this scheme, a buyer of an ‘under construction’ property is not required to pay EMIs for a defined time-frame or until he/she takes possession. Due to skyrocketing property prices it is quite apparent that people are unwilling to commit huge sum upfront and therefore any deferred payment plan has become the flavor of the season. Although, subvention scheme offers an attractive EMI-holiday option one should carefully read between the lines before an investment with developers who are offering the 20:80 scheme.
Benefits of such schemes to the builders:
Under the subvention scheme, a builder/developer ties up with banks or Non Banking Finance Corporations [“NBFC”] at the time of starting a project. The scheme is beneficial for the builders and developers as they can get access to the funds for projects at a cheaper rate of interest. The funding comes in the form of home loans that are cheaper as compared to commercial loans. Moreover, the developers benefit in terms of their credibility due to the association with banks. Also, the buyers get attracted to the property as they feel that they will be getting an EMI holiday till the possession of the property.
Risks involved in investing in such schemes:
If there is a delay in delivery of the project, then the customer stands to lose more because as soon as the subvention period is over, the EMI based on the 80% loan will begin, irrespective of the construction status. In the bank's records it is the home buyer who is the borrower of the home loan. Therefore, if the developer delays the EMIs he is supposed to pay on behalf of the buyer, it is the latter’s credit score that will suffer.
Precaution that one should take while investing in such schemes:
While such schemes may look good and beneficial at first glance, the fact is that if the project is delayed, an investor will end up paying much more than the original loan amount. Therefore, it is recommended that the end users should do a background check on the developer prior to making the property investment. One should ask the developer about approval of the property, exit strategies, and taxation policies. An investor should also buyer should also ensure that the property is not entangled in legal disputes it has all the necessary clearances.