Every respected family man is looking for the perfect home loan. As potential home buyers, we must be aware of the advantages and disadvantages of the various options available in the market. At the time of purchasing a new home, the developer suggests different schemes to the home buyer as well. One of these in the past few years has been the subvention scheme.
What does the subvention scheme entail?
The home buyer pays a margin of the amount to the developer. This is around 10-20% of the price of the property purchased. After that, he does not have to pay anything until the property is complete and he has full possession of his new home.
During the time from purchase of the home up until its completion, the balance amount is paid by the bank to the builder. This is a loan with a three-way agreement including the developer, the home buyer and the bank.
During the period of construction, it is the developer who pays the interest on the home loan to the bank, which provides the developer with the necessary money as the project progresses.
Does the subvention scheme work?
To a new home buyer, this scheme sounds like a dream come true. You need not worry about EMI payment until you’ve received the developed property.
But do not builders already have various schemes to help them in their projects? As a business, a developer already has the option of loans at lower interest rates. As a real estate business, the developer also has access to assets to be mortgaged. This will help unlock credit, all at a lower interest rate.
The sad truth that remains is that as a builder there is already a large debt that must still be repaid. While banks will opt to charge higher interest on new loans taken by the builder they approve when an individual with a good credit score opts for a home loan.
So while banks are under the impression that the real estate industry may be a bad investment the new home buyer still needs a good place to live.
What home buyers need to know about the subvention scheme
Though the scheme seems like a perfect plan for property investors, we need to be made aware of the shortcomings that it possesses.
In the subvention scheme, builders receive the instalments from the bank in a specific period. They also opt to pay interest on the loan for the same amount of time. Once that period is complete regardless of whether the home buyer has received possession of the home, the builder has the option to stop payments. He can also divert funds to other projects. It may take years for the project to be completed and the home buyer is left to fend for themselves until then.
As payments are halted on the home loan, it is the home buyer that suffers. This delay harms the CIBIL score and lowers the buyer’s ability to acquire good future loans. Waiting until the project is complete proves harmful to the buyer’s financial health.
The recent developments in the Subvention scheme
In the past few months, after numerous frauds committed by developers, the National Housing Bank has requested lending institutions to refrain from the subvention scheme. This will definitely harm the two main bodies of the real estate industry i.e the home buyer and the developer. With an increase in interest rates for home buyers, developers will be forced to face a liquidity crunch in cash flow. Many developers believe that the government should be in support of such schemes to help the growth of the real estate industry but there are those who want what is best for the home buyer.
Are there other schemes like this?
There are other schemes available in the industry to help home buyers like construction linked payment plans. These plans ensure that the developer receives fixed sums of cash flow when certain milestones are completed. These milestones or slabs make sure of completion of the home and work in favour of the home buyer. It keeps builders in check. 25% of the total amount is given only after possession is acquired by the home buyer.
The government, in order to boost the economy of the real estate industry, is constantly working on such schemes. But however many have loopholes and in the end prove harmful to the home buyer. Find out about past incidents with the developers before you step into these options. We all love a good bargain, but be sure to research well before you take the plunge.
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