Like anything else in the world, real estate projects also need marketing and promotion. And to make their projects sell, real estate developers often have to come up with various schemes and promotions to garner interest and augment sales.
Among the many other offers such as free home interiors on booking of an apartments, offer of gold coins or mystery offers, festival offers is the offer of interest subvention offered by developers of property.
Off late, subvention of interest is a common feature offered by property developers of large scale under-construction properties.
How Does a Subvention Scheme Work?
Under a subvention scheme, the home buyer does not have to pay interest till the possession of the property or till the agreed period under the terms of contract. Interest during that period is paid by the developer to the bank /financial institution.
Subvention schemes are tripartite agreements between the banker/house finance companies, the developer and the home buyer who avails a home loan to buy a home.
As there is no interest to be paid by the home buyer till the date of possession or till the agreed date, subvention schemes prove beneficial to them.
There are various schemes of Subvention like 15:75:10 and 10:80:10. This means that on allotment or at the time of booking the buyer pays a down payment of 15% or 10% as the case may be. The next tranche of 75% or 80% is loan amount that is disbursed by the bank directly to the developer who in turn pays the lender the interest on the disbursed amount. The disbursement is usually tied down to various stages of constructions.
This is line with RBI guidelines which directed that lump-sum payment of the loan amount should not be done to real estate developers to prevent cases of funds being diverted towards other projects of theirs.
Benefits of Subvention Scheme to Home Buyers
Relief from payment of interest till the possession: Home buyers can be spared of interest payment towards the loan disbursed till the time of possession. This particularly helps when an individual is paying rent and has booked an under-construction property.
Project delays would not affect the home buyers: As the interest on loan is being paid by the developers till the date of possession, then the project delays would not cause financial pressure on the home buyer.
Brings in sense of discipline among the developers: Real estate developers are known for delays in projects causing lot of hardship to the buyers. Introduction of RERA has bought about regulation on this aspect. Buying schemes under subvention will result in bringing discipline as delay in projects would, in turn, result in more payment of interest from the buyer’s end.
Drawbacks of the Subvention Scheme
Credit Score of the buyers can be affected: A point about subvention scheme that you should know is that the loan agreement is drawn between a home buyer and a lender as usual. The developer just promises to pay the interest till a pre-agreed period. However, if the developer doesn’t pay interest, the responsibility comes on to the buyer to pay the interest. And in case of any defaults, it is reported against the buyer.
Project cost goes higher: Though payment of relief through the period comes as a relief to the customers, developers generally add the cost of the interest through the period into the project cost. Therefore, it is good to make a comparison of properties, their cost vis-a-vis the cost of property under subvention scheme.
Not paying attention to fine text: No one bothers to read through the entire loan agreement. Even though it may be promised that the interest will be paid till possession, the written portion may bear a different period. A home buyer who doesn’t pay attention to these factors may be a loss later.
Subvention scheme may be great, especially for first time home buyers, however, it needs to be assured that the project is backed by reputed developers and there are no hidden clauses in the document.
