| HOW THE SUBVENTION SCHEME WORKS |
- Bank pays full loan amount to builder upfront
- Builder pays EMIs until property is handed to buyer
- Buyer is borrower in bank's books
- If builder delays repayment buyer's credit profile will get impacted
Recently, a number of developers have come up with such subvention schemes. According to this arrangement, you can buy an under construction property by initially paying 20-25 per cent of the total cost of the property. The remaining 75-80 per cent is paid by the bank directly to the developer. Till the customer gets possession of the house, it is the builder who pays the EMIs on behalf of the customer. The advantage for the builder is that he gets the entire funds up-front, instead of the bank disbursing funds at every stage of construction as is the case with a normal loan. Once the customer gets possession, his EMIs kick in. For this developers enter into three-way agreements with banks and customers.
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.