Watch out before buying a home under subvention scheme

Ajay Batra is a manager with an MNC in Gurgaon. Two years ago year he came across an ad in the newspaper that spoke about owning a dream house and not paying for it till one got possession of the house. This ad by one of the developers was referring to an innovative new scheme called the ‘Subvention Scheme’ offered by few selected developers then.

According to this arrangement, he could buy a under construction property by paying just 20% of the total cost initially and the rest 80% would be loaned to him by the bank who have tied up with the developer. The developer would subsequently pay the EMI’s to the bank until a predetermined period (also called the EMI-Holiday Period) is over and supposedly by then he gets the possession of the house.

When Ajay read about such an ideal scheme being offered by the developers, he immediately inquired and fixed an appointment with the developer. He met them over the weekend and to his surprise, got the loan approved for his dream house by the bank. He saw nothing wrong with the scheme as he knew that it would at least take 2 years for the construction of the flat to be completed and till that time he did not have to worry about paying any EMI to the bank.

Ajay went back to his normal routine and was looking forward to his new home. Little did he know this ideal deal was going to turn into a decision that he would later regret. One day he received a letter from the developer saying that the construction might be delayed due to certain issues and also the interest on the EMI’s had gone up marginally. He was confused and irritated on receiving the letter and decided to meet with them. When he met them he learnt that the developer was unable to complete the construction in the said time and weren’t liable to pay the EMI’s for the loan anymore. According to the agreement with the bank the buyer was to start paying the EMI’s after the 2 year period, irrespective of the construction status.

When Ajay approached the bank to explain his case to them, they asked him to speak to the developer. The developer came up with a number of excuses for the delay and agreed to pay a penalty of Rs 5 per square feet, which was insignificant when compared to the EMI’s that Ajay was supposed to pay to the bank every month. Leave alone the rent that he had been paying while the house is being built by the developer.

Ajay is likely to get the possession of the house in another few years. He ended up paying more than what was agreed upon.

Various developers have tied up with private banks in last few years to offer such schemes to customers. Before signing up for a scheme like this make sure you do your homework well. Remember the following pitfalls of ‘Subvention Scheme’ when buying a real estate:

 If there is a delay in delivery, then the customer is bound to lose out more. As soon as your subvention period is over, your EMI based on 80% loan will begin, irrespective of the construction status. You may have to pay rent as well as EMIs until the unit is ready for possession.

 If the developer delays the EMIs it is supposed to pay on buyer’s behalf, credit information bureaus will not hold the developer responsible. The person impacted in that case is the borrower i.e. the buyer. His/her credit (CIBIL) score will suffer.

 The property that you buy could be a disputed one, so extra care is advised when deciding to buy one. In case of a disputed property, you would need all your documents in place in order to get your money back from the builder.

 Given that most of the real estate projects get delayed, one may actually end up paying much more than he/she actually planned for.

 The penalty for the delay by the builder in most cases is insignificant and most likely to be adjusted against increased super area or any other is apartment readiness charges.

 The interest on the total amount is sometimes changed by the banks, putting you in a fix, if you have opted for floating rate home loan. Cashflow planning would need a review every time the interest rate changes.

 You may get capital appreciation on your invested amount, but the paper trail needs to be understood completely from taxation, ownership and exit clause perspective.

Recently, Reserve Bank of India (RBI) conveyed its dislike for such schemes where an 80:20 or 75:25 arrangements were made for any individual who was interested in buying a home under this scheme. The RBI was unhappy about the fact that the banks were making an upfront payment to the developer and putting their money at risk. It reminded the banks that the home loan disbursal should be thoughtfully 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.

Subvention scheme is a double edged sword! Watch out before you sign up for it.

Amit Kukreja is a fee-only financial planner (FPSB) and Investment Adviser (SEBI). He is the founder of WealthBeing Advisors, a financial planning and wealth advisory firm.


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