Is the 80:20 scheme a marketing gimmick to woo home-buyers?

Neeraj Beri works as a manager for a MNC in Noida and lives in a rented accommodation in South Delhi. A few months back he purchased a property for himself under the 80:20 scheme as it seemed to be quite beneficial. He and his family had been quite elated with the purchase until he received a letter from the developer informing that there might be a delay in the completion and delivery of the project. With other notices from bank informing about marginal increase of interest rate on his home loan, Beri is now uncertain whether availing the scheme has worked in his favour and concerned as to how will the delay of the project impact his finances.

Similarly, Richa Sharma, a small business owner, has been looking to buy a property of her own. On the face of it, she is attracted towards the 'subvention scheme'. As the scheme requires her to pay only 20% of the flat's cost to the developers while the rest is paid by the bank, she sees not having to pay any Equated Monthly Installments (EMIs) till the construction of the house is complete to her benefit. However, she is still wants to do all the research before landing into something that seems too good to be true. Are there any pitfalls of such schemes? Is the scheme a double edged sword for the customers? Let us talk in detail about the facts surrounding the 80:20 scheme.

What is a subvention scheme?

The 20:80 scheme or the subvention scheme was introduced in an attempt to beat the slowdown in the real estate business. It has been part of residential real estate over the last few years, but is now emerging as a popular marketing tool as it asks the home buyers to pay only 20% upfront, while the remaining 80% is paid at the time of possession. Under this scheme, a buyer of an ‘under construction’ property is not required to pay EMIs for a defined time-frame or until he/she takes possession. The scheme is becoming popular in pockets such as Delhi-NCR, Bangalore and Mumbai, where the supply is more than the demand.

What is the mechanism of subvention scheme?

Under the subvention scheme, a builder/developer ties up with banks or Non Banking Finance Corporations [“NBFC”] at the time of starting a project. The financial institute sanctions home loans to buyers for purchase of a property. After a set number of buyers, the banks release the entire loan upfront to the developer. The builder pays the pre-EMI for 1-2 years or the mutually decided subvention period. The scheme is beneficial for the builders and developers as they can get access to the funds for projects at a cheaper rate of interest. The funding comes in the form of home loans that are cheaper as compared to commercial loans. Moreover, the developers benefit in terms of their credibility due to the association with banks. The scheme proves to be beneficial for banks as they get access to a larger customer base.

How is the subvention scheme for customers?

The path to own a dream home is made easy for the home buyer as he/she need to pay only 20% of the total property worth upfront. As developers have tie up with banks, the formalities regarding the sanction of the home loan is less time consuming. However, before deciding on whether to take up the scheme, let’s see how the scheme holds out for the customers.

Attractions:

• The major and obvious advantage for the home buyer is that he/she is not burdened by EMIs during the construction period. If he/she is living in rented house, then there is no double pressure of paying EMIs as well as house rent.

Risks:

• If there is a delay in delivery of the project, then the customer stands to lose more because as soon as the subvention period is over, the EMI based on the 80% loan will begin, irrespective of the construction status.
• In the bank's records it is the home buyer who is the borrower of the home loan. Therefore, if the developer delays the EMIs he is supposed to pay on behalf of the buyer, it is the latter’s credit score that will suffer.

While such schemes may look good and beneficial at first glance, the fact is that if the project is delayed, you will end up paying much more than the original loan amount. Therefore, it is recommended that the end users should do a background check on the developer prior to making the property investment.