Subvention Schemes & Real Estate: The Link!
One comes across several advertisements and hoardings by builders that scream for prospective buyers’ attention with slogans like “Buy now, pay later!” or “Pay 10% now & rest after possession” or even better “Book now: No EMI till completion” etc.
These are some of the examples of subvention schemes offered by developers of real estate with tie-ups with banks and financial institutions. The discounts, freebies are extensively promoted by the builders to lure prospective homebuyers who obviously find these schemes irresistible.
Shaji Varghese, ED and Head, PNB Housing Finance, explains, “The target group is home-seekers who are currently living on rent and wish to avoid interest payment in addition to rent.”
Midsegment homebuyers love the concept of paying a small amount like 10% upfront and avoid having the burden of Equated Monthly Installment (EMI) as they are already weighed down by rent payment.
A tripartite agreement is signed between the buyer, the banker and the developer. A booking amount ranging between 5-20% is paid upfront by the buyer & the rest of the amount is paid by the bank in the form of loan to the buyer.
Thus, the most significant aspect associated with such subvention schemes is that the interest cost is borne by the developer and the lenders disburse the loan to the developer based on the progress of the construction. The interest is paid by the builder till possession is granted to the home buyer or for a fixed period as mentioned in the buyer-seller agreement.
Prior to 2013, the disbursement of home loans under subvention schemes was made at one go and the banks used to pay the full loan amount to developers upfront but the RBI clamped down on such schemes.
The RBI directed the lenders i.e. the banks to disburse loans according to construction milestones, as it wanted to reduce the risks involved and safeguard the homebuyers.
As the developer got all the money straight away, he had little incentive to finish the project on time. Thus, it was a risky proposition for both banks as well as the borrowers, in case the developer defaulted or the project got delayed. In case of any delay or default, it was not the bank but the buyer who got to bear the brunt.
The RBI took cognizance of these risk factors and in 2013 asked the banks to stop this practice and instead told them to link payments to the progress of construction.
Throwing more light on this, D.S. Tripathi, MD and CEO, Aadhaar Housing Finance, elaborates, “Loan disbursement is linked to the stage of construction, minimising the risks for banks and borrowers. The developer undertakes to service the interest component of the loan until a specified period. This is an incentive offered to buyers instead of giving an upfront discount on the going rate.”
The popularity of Subvention Schemes lies in the fact that homebuyer feels privileged as he is not burdened by EMIs from the initial stage as these schemes generally give a breathing period till possession.
Going with these schemes, homebuyers do not need to fret about cash flows as the interesting part will be taken care of by the developer.
Another advantage that a homebuyer, who is living on rent, sees is that they would not be bogged down by paying both; the rent as well as the EMI.
The biggest stumbling block of Subvention Schemes comes to the front when the real estate developer defaults or the project gets delayed. In such cases, the homebuyer suffers greatly as the loan is in his name and naturally the onus of repaying it also lies on him.
Additionally, a builder’s non-payment or late payment of EMI can spoil the credit score of a homebuyer as the loan is in his name.
A subvention scheme may turn out to be a double-edged sword if the developer fails to deliver the project on time, the burden of both rent and EMI will have to be borne by the homebuyer.
It has also led to many cases under IBC, RERA and Consumer Courts apart from regular cases.
Advitiya Sharma, co-founder, housing.com, elaborates the disadvantages of these schemes, “Subvention schemes tempt buyers to buy something they may not otherwise buy. The risk involved is that the buyer is expected to start paying EMIs after the subvention period is over, even if he/she has not yet received the possession of the property. In such a scenario, the customer faces the risk of overpaying or, in some cases, risk pertaining to delivery of the property.”
National Housing Bank (NHB) in July 2019 has directed Housing Finance Companies (HFCs) to refrain from lending under subvention schemes. This of course has clipped the wings of HFCs but not eliminated subvention schemes altogether. The builders are still offering ‘rent’ and ‘EMIs’ etc. to the homebuyers.
Vipul Patel, Founder, MortgageWorld.in, a mortgage advisory company, explains the reason, “Some banks continue to finance such schemes as they are not bound by the NHB circular.”
A senior official of a large Housing Finance Company adds, “After the NHB ban, some builders are offering to reimburse the interest to the customers instead of the lender.”
Talking about this loophole, Vipul Patel says, “Since developers are independent entities, they are free to create schemes within the allowable legal framework. The borrower should take legal and tax advice before signing up.”
A bigger dilemma is faced by the borrowers who have already signed up for such schemes as the NHB circular covers not only new products but also the existing ones.
D.S. Tripathi, MD and CEO, Aadhar Housing Finance, states, “In case of a delay in construction, the lender can withdraw from the agreement as the disbursement is construction stage-linked.” Under such circumstances, borrowers need to approach the builder and get the agreement reviewed otherwise they will be left in the lurch.
For a homebuyer subvention scheme can undoubtedly be beneficial for people who want to avoid the burden of EMIs as they are staying on rent and their income is limited. But there is a catch to it and people must not go for it blindfolded as most of the time they are duped by the manipulative real estate developers.
Here is a list of precautionary steps that a homebuyer needs to take before opting for any subvention scheme:
#Step 1. The financial strength of the developer should thoroughly be scrutinized by the prospective homebuyer.
#Step 2. Additionally, it is the duty of a homebuyer to find out the past record of the builder in delivering projects on time.
#Step 3. Checking ownership details and the necessary clearances of the project are a mandatory precautionary step. Aditya Verma of makaan.com advises, “One should ask the developer about approvals, exit options and taxation policies. The buyer should also ensure that the property is not entangled in legal disputes and has the necessary clearances.”
#Step 4. Not only the developer but also the bank’s antecedent should be looked into by the potential homebuyer. “The bank’s profile must also be checked by the buyer,” says Anil Tayal, director & CEO, Informage Realty.
#Step 5. Finally, reading the fine print and going through all terms and conditions, like the promised possession date in the documents and the penalty to be paid by the developer if the project is delayed, etc., is of utmost importance before signing the agreement.
The Last Word!
Not all subvention schemes can be labelled as good nor are all of them bad, therefore, the most critical aspect for a prospective homebuyer is to examine each scheme on its merits and then take a call.
Anil Tayal, director & CEO of Informage Realty provides guidance to homebuyers and says, “One can go for a subvention scheme if one earns Rs 6-20 lakh per annum as it provides a good opportunity to own a house without paying EMIs till the subvention period.”
While other domain experts are of the view that one should go for these subvention schemes only if the builder has a credible track record.
Agreeing with this, Aditya Verma, CEO, makaan.com says, “One should avail of this scheme if the chance of the developer missing the deadline is low.”
Vineet K Singh, Business Head, 99acres.com, brings to light another crucial point, “In today’s scenario, where over 10 lakh houses are delayed, home loan companies can’t work in a traditional manner where they force buyers to pay interest on time on projects which are delayed. As of now home loan companies don’t have any responsibility to ensure that the project for which the loan is taken is being built or not.”
Thus, as more and more banks and housing finance companies are keeping away from subvention schemes it is advisable for homebuyers to be extremely cautious.
“Being aware & informed is the ‘mantra’ for home buyers if they don’t want to fall into the trap of dubious subvention schemes!”
-Shweta Gupta, Founder and CEO, MUDS