SMART SOCHO: Subvention Schemes, Boon or Bane?

It’s a curious situation really. Buyers looking for homes are skeptical of making a huge capital investment in an under-construction project, mainly due to frequent delays in completion, which would leave him saddled with a huge debt.

With sales sluggish, developers are faced with a tight liquidity crunch and are being forced to borrow funds from the market at sky-high interest rates. Banks on the other hand, are also not exactly forthcoming in lending funds directly to developers due to the risks involved with regard to project completion and sluggish market conditions.

It was Catch-22 situation that needed to be resolved urgently.

The answer? Interest subvention schemes.  An ideal solution which if implemented properly would present a win-win situation for all the three parties involved in a property buying transaction, namely the buyer, the developer and the bank which disbursed the loan.  It’s a tool that is being increasingly used by developers to woo customers in a tight market situation when homes are not exactly flying off their shelves and much-needed funds are extremely hard to come by.

How Does It Work:
Well simply put, a builder attempts to attract as many buyers as possible by announcing a subvention scheme for his ongoing project, a buyer books a property in the said project and gets a EMI holiday for a fixed period or till the project completion, while the bank gains by getting a pool of multiple customers for the same project.

To elaborate there are mainly three types of subvention schemes being offered by a majority of builders today. In the first, the buyer typically pays about 10-30 percent of the cost upfront directly to the builder, who in turn bears the interest cost on the buyer’s home-loan until possession. The balance amount is released in stages by a bank as per the construction progress of the said project. The buyer who is already paying rent stands to gain since his EMIs commence only after he gets possession on project completion.

The second option or scheme being offered does not involve any bank and is a two-way purchase agreement between the developer and the buyer. Here the buyer makes a part payment upfront ranging from 10-30 percent of the property cost, while the balance is payable at the time of possession. Typically, developers also customers the option of making staggered payments (20:60:40, 10:60:30) for the balance linked with the progress of construction.

Some of the leading developers currently offering such schemes @Mumbai include Lodha for its  Codename Masterpiece project at Wadala (20:80) and Supremus commercial project at Powai (20:80), Rustomjee for its Paramount project at Khar West (20:80), White City at Kandivali East (25:75) and K Modrani Realty for its La Maison project (10:80:10).

More recently, many leading developers have introduced a new innovation wherein if the buyer’s bank agrees to pay the entire balance amount in say 10 installments, the buyer has the option of paying the upfront amount to the developer in smaller more palatable installments.

Why it works:
The above-mentioned schemes work on many different levels. The first obvious advantage for the buyer who has booked the property is that he doesn’t have to shoulder the dual burden of paying both the EMI’s (on his home loan) and the rent for the property he currently occupies.

For the developer, such schemes not only provide an excellent marketing tool to attract a ready pool of buyers to his project but are also a great incentive to finish the project on time or before, since he has to bear the interest component of the home loan until project completion. Moreover he also gets access to the much-needed funds from a bank at a reasonable rate of interest as opposed to borrowing from commercial sources at market rates which are much higher.

For the banker, it’s a more secure way of disbursing funds since the loan stands in the name of the buyer and not the developer. Further it stands to gain by securing more customers for a single project thereby earning interest on the funds borrowed. The developer refers customers in bulk and the bank in turn approves the home loans at the earliest in a cost-effective manner.
 
While earlier banks were known to pay the entire loan amount to developers in a single tranche, as per new RBI directives, the amount is now released in a staggered manner as per the construction progress of the project. This has further strengthened the security aspect of the transaction for both the buyer (since the loan is in his name) and the bank, since they are now insulated from any defaults on account of project delays.
 
Many Benefits to Buyers:

• The chance to own a property/apartment by just making a low down payment.
• Freedom from EMI payments on loan for a fixed period/until possession.
• Ideal for buyers living in rental accommodation.
• With banks involved there is added safety of investment.
• Timely delivery of project is generally guaranteed since the developer has to bear the EMIs.
• Buyers gain access to bank funds which charge a lower interest rate as compared to other commercial sources.
• Tie-ups between bank and developers ensure a faster loan disbursal for a buyer with minimum hassles.
• Clients normally enjoy advantage of pre-closure of loan amount, sans any charges, if pre-payment is being made from his/her personal sources.