In the world of real estate, the journey from envisioning your dream home to owning it can be both exhilarating and challenging. Prospective homebuyers often encounter a myriad of enticing advertisements and hoardings with alluring slogans like “Buy now, pay later!” or “Pay 10% now & rest after possession” or even better, “Book now: No EMI till possession.” These captivating offers are part of what is known as the “Subvention Scheme”.
A subvention scheme is a financial arrangement between a homebuyer, the developer, and a financial institution that aims to ease the burden of purchasing a property. However, it is essential to comprehend its workings, benefits, and potential pitfalls. This blog aims to simplify the concept of subvention schemes, outlining its benefits, risks, and how it can be a game-changer for homebuyers.
What is a Subvention Scheme?
A subvention scheme is a financing arrangement where the builder or developer partners with a financial institution to assist homebuyers in acquiring a property. In this scheme, the developer bears the burden of paying the pre-EMI interest or a portion of the home loan interest on behalf of the buyer for a specific period. Typically, this period spans from the time of booking until the project’s completion or possession.
How does a Subvention Scheme work?
The subvention scheme process can vary slightly from one project to another, but the general framework is as follows:
Agreement between Developer and Lender: The builder and the financial institution enter into a formal agreement to offer subvention to homebuyers.
Homebuyer’s Application: The homebuyer applies for a home loan with the lender associated with the subvention scheme. Homebuyers need to pay a small percentage of the property value upfront (usually around 5-20% of the total cost) as a down payment.
Disbursement and Interest Payment: After loan approval, the lender disburses the loan amount to the developer in installments based on the construction progress. During the construction phase, the developer pays the pre-EMIs or interest on behalf of the homebuyer.
Possession and Handover: After the completion of the project or possession of the property, the buyer takes over the home loan, and regular EMIs commence.
Benefits of Subvention Schemes:
Eases Financial Burden: The primary advantage of a subvention scheme is that it offers considerable relief to homebuyers’ during the construction period. As they are not required to pay EMIs, it allows them to source money until the EMI starts, easing their financial burden during the initial phase of homeownership.
Safeguards Against Project Delays: Since the developer is responsible for paying the EMIs during construction, they are incentivized to complete the project on time. This aspect ensures that buyers are less likely to face delays in possession and can move into their new homes as scheduled.
Enhances Affordability: Subvention schemes widen the scope of potential buyers as it enhances the affordability of the property. It enables people who may not qualify for regular home loans due to financial constraints to own a property without immediate financial stress.
While the subvention scheme may seem like an alluring proposition, potential buyers should exercise due diligence and consider the following factors before committing to such an arrangement.
Credibility of the Developer: It is crucial to research and choose a reputable developer with a history of delivering projects on time. Examine the developer’s financial ability to meet their obligations. Avoid developers that are deeply in debt or are on the verge of bankruptcy.
Clarity on Terms and Conditions: Thoroughly understand the terms and conditions of the subvention scheme, including the period for which the developer will bear the EMIs and any associated charges.
Impact on Credit Score: If the developer fails to pay his EMIs on time, the bank will not hold him liable because, according to the bank’s records, the borrower is the homebuyer. Hence, it will have a negative impact on the buyer’s credit score and effect his future loan eligibility.
Subvention schemes have emerged as an attractive option in the real estate market, providing buyers with financial relief and other benefits during the construction phase. However, it is crucial for homebuyers to conduct due diligence and thoroughly understand the terms and conditions before entering into such agreements. With the right approach and the support of credible developers, subvention schemes can be a game-changer, making homeownership dreams a reality for many prospective buyers.
