Friday, September 12, 2014

Subvention Scheme Win Win Situation in Real Estate

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 Subvention Scheme

Subvention scheme is a double-edged sword

If possession is delayed, the home buyer could end up paying both rent and home loan instalments

 Subvention Scheme is a new form of bank financing for home loans. According to this scheme, after an individual applies for a loan for a property under construction, the concerned person need not pay any Pre- EMIs till fixed period or possession i.e., all the interest till fixed period or possession will be paid by the developer. So, basically you own a property without having to pay any interest till fixed period or possession! Currently, banks have agreed to this form of financing only for Category A developers. Under the subvention scheme the banks / financial institutes disburse 80% of the value of the property to the company and instead of passing the Payment discount to the customer; the Company pays the PRE – EMI (interest) component to the bank on behalf of the customer for the specific period as per the subvention scheme plan. The loan is sanctioned / disbursed by the bank based on the eligibility of the customer to service the loan. Basically, it’s the end user or buyer who is lent the money from the bank. The bank has no concern with EMI sharing scheme, it just finances your home loan on the basis of the cost of your flat. The bank charges EMI from the buyer’s account always. However, under the subvention scheme the banks deduct the EMIs from the builder’s account. Even in such cases, the builder will just pay the interest and not the principal.

Benefits to Buyer, Builder and banks by offering subvention scheme

    A pre EMI holiday till fixed period or possession where you get time to plan for the finances.
    Ideal for customers who are living on rent. First, the buyer pays rent and no EMI, later he pays EMI and no rent.

    An initial payment of 15% - 20% thus easing financial load on customers.
    Customers able to source loans from the bank at a lower rate than the market rate.
    Quality assurance - when banks are involved it ensures that the customer’s investment is safe.
    Greater return on investment with subvention scheme given the property price hike over a period of 2 years as compared to the normal bank scheme.
    Customer will not have to pay any installment or interest against the loan.
    The interest payable by the customer for the applicable period will be shouldered by Developers.
    Only after specific period or after possession EMI will start as per the term agreed by the customer with Bank.
    Own the apartment – with the minimum investment: Pay 15% - 20% only as initial payment.
    Client has an option for pre closure** of the loan amount even immediately after the applicable period with no pre closure** charges, if the pre – payment is being made out of his own sources.
    The customer is also benefited as the builder ensures a timely delivery of the project to decrease the interest rate burden on him.

Builder benefits

    Developers attract buyers by launching projects under subvention scheme
    For cash-strapped developers, the 20 per cent upfront payment gives them adequate liquidity. And there is pressure to execute the project quickly. The remaining 80 per cent is funded by the bank, which creates a bipartite escrow account that keeps disbursing the funds as the project progresses.
    The developer utilizes the funds required for construction at an interest rate on home loan that is far cheaper than the commercial interest rate

Bank benefits

The bank gets a pool of customers from a single residential project. The developer keeps referring customers in bulk and the bank approves the loans at the earliest. This also proves cost-efficient for the bank.

Subvention scheme is an ideal example of win win situation as all the parties builder / buyer and banks are benefitted. Builder attract buyers by offering subvention scheme, buyer gets emi holiday for fixed period and bank earn interest and also attract buyers for home loans.

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While this may sound like a win-win for both the developer and the customer, there are several catches that customers must be aware of.

    If there is a delay in delivery, then the customer stands to lose more. As soon as the subvention period is over, the EMI based on the 80 per cent loan will begin, irrespective of the construction status. In case the house is not ready by then, and if the customer is staying on rent, he will have to pay both the rent as well as EMIs.
    If the developer delays the EMIs he is supposed to pay on behalf of the buyer, credit information bureaus will not hold the developer responsible, because in the bank's records it is the customer who is the borrower. This means the customer's credit score will suffer.
    If the property is a disputed one, customers must make sure all documents are in order. Or else getting your funds from the builder could be tough.
    Given that most of the real estate projects get delayed, one may actually end up paying much more than he/she actually planned for.
    Even if the builder is penalised for delay in handing over the house, he will try to recover it by offering lesser area under the guise of super built up area or levying other charges. So, there is no benefit for the home buyer.

Recently, the Reserve Bank of India (RBI) conveyed its dislike for such 80:20 or 75:25 schemes. The RBI was unhappy about the fact that the banks were making an up-front payment to the builders and putting their money at risk. The home loan disbursal should be linked with the stages of construction of a building, so that the money loaned by the bank does not get locked up in case of a dispute between the borrower and the developer, said RBI.

While such schemes may look good at first glance, the fact is that if the project is delayed, you will end up paying much more than the original loan amount. In fact, these schemes are floated only because developers were finding it difficult to raise funds. In a lot of cases, developers diverted funds raised for one project towards another. Subvention schemes are a double edged sword. So, watch out before you sign up for it.

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