Subvention Schemes : Lucarative or Just another trap

Subvention Schemes : Lucarative or Just another trap

Recently we all have been hearing a lot about the widely promoted subvention schemes where you can own your dream home with payment of only 10% to 20% of the cost of the property and rest at the time of possession.

For any mid income group individual or for someone planning to start his investments in real estate , the subvention scheme seems to be a win – win situation. However the big question is – is it actually a win- win situation. Let’s understand the game plan

What is Subvention Scheme?

A subvention scheme is offered by developers where the developer enjoys the money received upfront from you and from the financial institute on your behalf as cost of the apartment you have bought. Assuming a developer offers 20:80 subvention scheme on an apartment worth 80 lacs, the investor need to pay 20% of the cost upfront to the developer i.e 16 lacs is paid up front , the rest 64 lacs is paid by the bank to the developer on the basis of your loan eligibility. In such a scenario in comparison to the construction link plan the developer gets the total amount upfront for the flat, where the developer will pay the interest on the money paid by bank on your behalf till the period of subvention.

The way the above scheme is marketed and proposed to the investors it looks extremely lucrative, however there are certain known certain unknown risks.

Pro’s

a.       The investor shells out only 10 to 20 percent of the cost of the property

b.      The investor gets interest free loan for the subvention period.

c.       The developer pays the EMI’s or the interest for the period of subvention

d.      Some developers claim that they would pay any penalty charges as well

e.      The customer pays the balance money to the bank in form of principal and interest after possession or after the period of subvention scheme.

Con’s

a.       From day one the developer enjoys the initial 20% amount paid by you.

b.      The developer get 95% to 100% of the cost of the apartment from bank and you without even starting the construction in some cases.

c.       The “SUBVENTION SCHEME” comes with a lock in period or a mentioned time period , where the subvention scheme is for say 24 months or 36 months – i.e the developer will pay the interest EMI’s only till the period of subvention, after the subvention period is over the EMI’s to the bank will be paid by you “whether the construction of the project is completed or not, whether the possession of the property is handed over or not”

d.      What happens if the company stops paying the EMI’s – who is accountable?

What are the end results?

1.       If the developer delays construction (which is certain in majority of the cases) the EMI payments on the loan would be paid by the investor from the day the subvention scheme ends.

2.       If the developer delays the EMI payment during the subvention period the CREDIT SCORE / CIBIL RATING of the investor gets the impact – as it the investor who has taken the loan.

3.       Such schemes offered by developers also comes with higher interest charged by banks and the investor is helpless to choose as there are no options available.

4.       In subvention scheme where 95% to 100% of the money of an under construction project has been paid by the investor there are no option of EXIT as you would hardly find buyers who would pay 100% money for an under construction property.

In crux on the basis of above mentioned it is recommended to go for subvention plans only in those cases where the building is almost ready or the developer has a clean track record else the investors end up paying much more than they ever expected.