Last week, 3 Big Hoardings caught my attention “NO EMI For 24 Months“, “Book Your Dream Home at Just 8% Interest Rate” and “Book Now Pay Later”. It seems to be some divine intervention which is helping / supporting me to fulfill my dream of owning a flat. “HOLD ON” signals my mind to my heart. Remember the Golden Rule of Finance “There are No Free Lunches in this World”. This divine intervention is named as “Subvention Scheme“. Word Subvention is derived from Latin word “Subventus”. It means Monetary Help or Support. Subvention Schemes were banned by RBI on 3rd September, 2013. These schemes were re-launched with slight tweaking of payment being linked to Construction Linked Plan but basic nature was retained. You must have observed that Housing Finance Companies are taking lead to promote such schemes as they are not governed by RBI. In few cases, bulk payment is released upfront to the builder by HFC’s so that builder promote Home Loan of that particular HFC.
Normally a buyer gets confused between Construction Linked Plan, Possession Linked Plan and Subvention Scheme. By offering multiple payment plans and differential price, builder confuse buyer. In marketing, “Creating Confusion is best strategy” to convince buyer. Subvention Schemes are launched under different variants like 15-75-10, 15-80-5 and more recent one is 10:70:10:10. The most popular avatar was 80:20 / 75:25 which was banned by RBI.
How to read Subvention Scheme?
Lets understand with an example of 10:70:10:10 scheme. 10:70:10:10 is special Subvention scheme for home loan. Under this scheme customer will pay 10% of total property value at the time of booking the property. This amount will include registration fees, stamp duty and VAT also. After that Home Loan Provider / Bank will pay 70% at various stages of construction i.e. Construction linked plan. Once 80% payment is complete, buyer will pay 10% and then the bank will pay the balance 10% at the time of possession. To make scheme lucrative, HFC’s are offering discounted rate of interest of 8% under Subvention Schemes. Cost of interest subsidy is borne by the builder for limited period. In most of the cases “EMI Holiday Period” of 24 to 48 months is offered to the customer i.e. Pre-EMI interest during this period will be borne by the builder. Now objective behind 10-70-10-10 scheme is to reduce entry cost for buyer compared to 15-75-10 scheme which may bring more buyers.
Please don’t go by numerical values, all schemes are same and its a marketing gimmick to tweak numbers. Revised version is launched as a new scheme. To summarize, 1st Value is Booking Amount & Last Value is payable at the time of possession. Substantial % value in middle is paid by the Bank / HFC as a Home Loan which may or may not be linked to construction.
Now you must be wondering where is the risk involved in Subvention Schemes. Lets check out
Risks Associated with Interest Subvention Schemes
1. EMI Default by Builder impact CIBIL Score of a Buyer: One of my client Neha Sharma from Pune applied for Credit Card and her credit card was rejected due to low CIBIL Score. She was totally lost as she never defaulted on any of the payments. In her CIBIL report, i observed payment default on Home Loan EMI’s. When i checked with her, she told that she bought joint property with her father from builder under Subvention Scheme. In this scheme, builder was suppose to pay EMI for 48 months but he started defaulting on EMI’s after 8th month. This is the biggest drawback of Subvention Scheme. It is very difficult to ensure whether builder is paying EMI on time or not. Buyers understanding of “NO EMI for X No. of Months” is that there is No EMI payment to Bank / HFC. Fact of the matter is that builder has to pay Pre-EMI on behalf of buyer. By handing over key of your CIBIL Score to builder, you are taking huge credit risk.
2. High Cost under Subvention Scheme: Not many people know that under different payment plan i.e. possession linked plan, construction linked plan, subvention scheme etc the cost of property is different. The discount or benefit offered under any scheme, the cost of same is already inbuilt in the payment structure of that particular scheme. Therefore under Subvention Scheme, the cost of property will be on higher side. Whenever you approach builder, you should never disclose your cards and understand all payment plans very well. You can do cost benefit analysis before finalizing the payment plan.
3. Agreement of the scheme: A tri-party agreement is signed between builder, buyer and the Home Loan Provider for such schemes. Builder only share Application form along with brief T&C document. Most of the commitments from builders end are oral in nature. Lot of finer details about the scheme are not included in application form. It gives impression to buyer that he is getting one of the best deal in this world. Builder is reluctant to share agreement copy before initial 10% or 15% Booking Amount is paid. It is absolutely necessary to understand the terms and conditions in agreement before opting for Subvention Scheme. The catch lies in the fine print of the agreement. Many buyer sign without going through the scheme details and then cry foul play. Do remember that entire risk in this transaction rests with the buyer.
4. Lock in Period: In most of the Subvention Schemes there is a lock in period. During Lock in period buyer cannot sell the property. Though it is anti-competitive practice but being a special scheme builder justify the same. Risk is if you would like to exit during lock in period then you cannot exit thus your money is locked. Even if there is no lock in period, penalty of exit is very steep. In some cases, it is as high as 5 Lakhs.
5. EMI Holiday: In many cases, i observed that buyers were not aware that EMI Holiday is for limited period. Mostly builders “Sell” Subvention Scheme as No EMI / EMI Holiday till possession. You must be wondering How they do it?. Suppose you are availing Subvention Scheme in Mar’15. Builder will mention projected possession date as Mar’17 and EMI Holiday is of 24 months. Technically builder is right that there is “NO EMI TILL POSSESSION“. Problem starts if there is delay in project which i will discuss in last point.
6. Taxation Issues: Under Subvention Scheme there are lot of taxation issues like whether TDS u/s 194IA is applicable or not. Reason being, Buyer is not paying the installment to bank but builder is paying. Secondly, whether any payment from builder to bank will be considered as income for buyer or not. Lastly, whether buyer can claim tax deduction u/s 24(B) on Pre-EMI interest paid by the builder. Kindly clarify all such taxation issues.
7. Delay in Project: In my posts, i always mention most crucial & Imp point as last point. In this case also “Delay in Project” is Center of Universe. I discussed in my post why under construction projects get delayed?. The whole argument and debate in this post rests on single point whether there will be delay in project or not. Trust me if there is no delay then Subvention Scheme is most beneficial for buyer but not for builder :). There is a misconception that builder has incentive to complete project on time whereas it is other way round. If there is delay in project, the cost of property will increase exponentially for buyer. All the benefits of Subvention Scheme will wipe off in few months. Secondly, in case of delay and after EMI holiday period buyer may find it difficult to pay Pre-EMI. This is one of the key reason for default on Home Loan. Normally builders put onus on delay in obtaining Govt approvals for delay in project therefore it is advisable to opt for subvention scheme only when all govt approvals are in place. Though builders put penalty clause for delay but enforcement of such clauses is next to impossible. Couple of Govt Approvals are intentionally kept pending to avoid penalty for delay.
Through this post, i am not passing any verdict on Subvention Schemes but my only request is to check all the details thoroughly before signing below the dotted line. It is imp to check past history of builder i.e. track record of project completion. It is always advisable to take professional help so that you are aware of pros and cons of such schemes.
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