18 June, 2018 Home Loans
Real-Estate is a quite competitive market and developers have to come up with new kind of schemes to attract the customers. One such tempting schemes that make sure to attract customers is the ‘Subvention Scheme’.
Know all about Subvention Scheme by developers
Real-Estate is a quite competitive market and developers have to come up with new kind of schemes to attract the customers. One such tempting schemes that make sure to attract customers is the ‘Subvention Scheme’ also known as Interest Subvention Scheme. Many times you must have seen advertisements where builders boast claims like: ‘No EMI for 4 years’ or ‘Pay Nothing for 3 years’. Although all these seem like just void claims, it would be fair to say that these are not just void claims and holds the truth in them.
Subvention comes from a Latin word Subventus, which means monetary help. It is mainly targeted for home buyers who choose to avail loan facility to buy their property. The scheme is specially designed keeping in mind, those home loan borrowers who are already living in rented homes and thus are in no position to overburden themselves with monthly EMIs, over and above the monthly rents that they are already paying.
Understanding the Subvention scheme:
The first thing to understand here is that there are three parties involved in this scheme: the builder, the banker, and the customer/borrower. At the time of availing the loan, all three parties get into an agreement, the ‘Tri-Partite Agreement’ where all three parties agree to the typical payment schedule that is set in this scheme. The buyer can book the property by giving a small percentage of total property value, generally, this varies from 5% to 20% of the total property value. Rest 80% is paid by the bank/NBFC towards the builder in a phased manner as the construction progresses. The best part is that the interest is paid by the builder until the buyer possesses the property.
An added indirect advantage in the subvention scheme is that, since interest is paid by the builder, it acts as an added motivation for the developer to complete the project in pre-specified time, that is clearly mentioned in the payment plan of the builder.
Benefits of Subvention scheme:
1. One of the best advantages of this scheme is that it reduces the burden of monthly EMIs, in addition to the monthly rent that the customer is already paying.
2. The customer is now more assured that there will be timely possession of his property since the builder wouldn’t want to pay extended interest, which otherwise he has to pay in case of delays the completion of his project.
3. Not just home buyers, but developers also benefit from this scheme. It provides the builders, an easy access to a good amount of funds through banks or NBFCs in form of home loans for buyers which they use to construct their projects, and rate of interest is also quite low as compared to the commercial loans.
4. Another benefit to builders is that they enjoy increased credibility due to their association with reputed banks / NBFCs, which further attracts home buyers.
Some Caution Points:
1. One of the biggest risk associated with this scheme is that, if the developer fails to pay the interest that he is supposed to pay on buyer’s behalf, it has a very adverse effect on the credit history of the buyer. This will, in turn, have a very negative impact on credit health of the buyer.
2. Although it is claimed that the customer doesn’t have to pay any interest till possession, but you never know, the builder might have included that cost already in his total cost of property, as nothing in this world comes for free.
3. There is a big risk associated with this scheme, which is, what if the builder is diverting that money towards other projects, instead of using those funds to complete the current project.
4. The common claim associated with this scheme is the ‘No EMI till possession’ scheme, but customers should be very cautious in going through the agreement in a detailed manner, as it may mention any clause that may mention a cut-off date that is associated to ‘projected possession’ after which customer’s EMI may start, even if the project is not completed. This will result in over-burdening the borrower.