What is a subvention scheme?

[ecis2016.org] In a subvention scheme, the buyer pays the interest on his home loan only after getting the possession of the house.

What is a subvention scheme?

A subvention scheme is a tripartite agreement among the buyer, developer, and the bank providing a home loan for purchase of a unit in an under-construction project. Under this agreement, a buyer pays 5-20% of the property value as the down-payment. The remaining money is serviced by the bank directly to the developer in instalments. In return, the developer pays the interest incurred for the remaining amount till the construction completes.

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The buyers pay the interest only after the complete possession of the house. Meanwhile, the bank disburses the amount directly to the developer to expedite the construction process.

Why subvention schemes appeal  homebuyers?

The subvention scheme appeals hugely to the rent payers. Since this scheme allows the buyers to commit a fraction of the total obligation, they need not pay the interest on the loan before the possession of the house. It grants them enough time to accumulate money while the project continues. After the subvention period, they have to pay the EMI for the balance amount, which comes at a lower cost.

In the subvention scheme, the developer incurs a loss if the project gets delayed, as they must continue paying the interest to the bank as per the agreement. It inevitably delays the balance amount due from the buyer. Hence the construction process runs smoothly with the loan amount provided by the bank, and the ‘Buy now, pay later’ phrase holds.

Difference between subvention scheme and subsidy

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There is a stark difference between the subvention scheme and the subsidy. The subsidy is a grant wherein the government pays a fraction of the money towards the expenditure to cut down the overall expense incurred by the entity or an individual.

Advantages of subvention schemes

Homebuyers can avoid paying the interest in the initial days till the time of completion of the project. Secondly, the delay in the project does not affect the buyers since the builders are liable to pay the interest till the completion as per the agreement terms. Additionally, it instils discipline in the developers to finish the project on time and most likely stick to the commitment.

The subvention scheme is a boon to the sellers too. Banks have tight regulations on disbursing loans to the developers. Such systems help builders encash on the opportunity and access about 80% of the funds at low interest. They also help scale the chance of selling and increase the demand for the plot.

Subvention scheme risks 

Like every scheme, a subvention scheme comes with a price. Some sellers add a written clause wherein they pledge to pay the interest amount only for 12-18 months. Hence, irrespective of the completion of the project, the buyer is obligated to start paying the EMI.

Another drawback is the price of the property. The prospect of paying no interest during the ongoing construction might lure the buyers, but the sellers add the interest rate to the final amount. It increases the overall price of the property considerably and increases the risk of overpaying for the property. It comes as a natural shocker that the subvention scheme can tarnish the buyer’s reputation if the developers default on the loan interest.

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Therefore a thorough background check of the developer and a diligent understanding of the terms and conditions of the scheme goes a long way.

Ban on subvention scheme in housing sector

In 2019, the National Housing Bank (NHB) ordered the financial institutions to desist from lending loans as per the subvention scheme owing to the disproportionate use of funds. Several real estate developers routed the money by the bank into other businesses and raised the apartment’s value above the market trend. However, this move received a backlash from the developers raising concerns over the liquidity crunch and fall of the real estate market.

Moreover, it will decrease the demand for the properties and increase the cost of capital. On the downside, this move will straighten out a few weak areas like default on the interest, delay in the competition of the projects, and misuse of the funds.

The method wins the hearts of the rent bearers who are unwilling to put huge money upfront before the possession of the house. On the other hand, small developers struggle to find buyers on their property and fear losing money on the investment. Hence a deferred payment plan like this is a winner.

Several companies encourage subvention schemes to scale up their sales. It is a go-to option for those buyers who want to buy time to accumulate cash for the house purchase. The number of developers relying on this scheme is on the rise, so it is advisable to cautiously choose the seller after checking the credibility and the mutual agreement on the payment clause.

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Source: https://ecis2016.org
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