What Should Consumers do When Developers Back Out of Subvention Schemes?
November 2022
A subvention scheme is a tripartite arrangement between the developer, the bank financing the home loan, and the buyer of a unit in a project that is still under construction. As per this arrangement, the homebuyer makes a down payment of 5 to 20% of the property's price. The lender bank gives the developer the remaining money in installments.
The developer covers the interest accrued on the outstanding balance till project completion. In a subvention scheme, a home buyer pays loan interest only after taking ownership of the house.
Why do Subvention Schemes appeal to Home Buyers?
Subvention schemes are very appealing to renters. Why? Because the scheme allows buyers to commit only a portion of the total obligation. They are exempt from paying interest on the loan prior to taking ownership of the property.
So, renters have adequate time while the project is still in progress to save money.
What happens after the subvention scheme is over?
Home buyers have to pay the lower-cost EMI for the remaining debt after the subvention period is over. Also, the developer will continue to pay the bank interest even if a loss occurs and the project is delayed. Though, this will also cause a delay in the buyer's remaining balance.
The construction process nonetheless continues proving that the saying "buy now, pay later" is true.
Are Subsidy and Subvention Schemes the same?
The subvention scheme and the subsidy scheme are very different from one another.
A grant or subsidy is when the government contributes a certain amount to the cost of the property. It helps to lower the expense borne by the person or business.
Types of Offers in Subvention Schemes
Buyers from developers can choose between two different plans under these subvention schemes.
- The first is a subvention scheme in which the homebuyer pays 10–20 percent of the sale price as a down payment. Next, the developer, the buyer, and the bank enter into an agreement. According to the agreement, the lender bank will pay the remaining sum to the developer.
Here, the developer pays the bank's interest on the loan while the project is being built. Developers are paid by the bank, but construction does not begin until the buyer takes ownership and begins making EMI payments.
- * The second scheme is a deferred payment arrangement. This is between the buyer and the developer. In this plan, the buyer pays 5-25 percent of the total price at the time of sale. The remaining amount is paid when taking possession.
Deferred payment plans are available in various permutations, such as 30:30:40 or 10:70:20. Payments are made at different stages of construction.
This clever subvention scheme is a recent concept, as consumers are unwilling to commit a significant amount upfront due to rising pricing. Thus, deferred payment schemes are currently popular.
Risks Involved in Subvention Schemes
- * A subvention scheme has a price, just like any other plan. A potential concern here is that even if the homeowner hasn't yet taken ownership of the property, he will have to start making EMI payments once the subvention period is over.
- * Subvention schemes have put buyers in problems in the past. When developers stop making EMI payments, the banks approach the buyers to pay since they are the primary borrowers.
- * Some developers promise to cover the interest cost only for the first 12 to 18 months. In this case, the buyer will have to make EMI payments regardless of whether the project is completed.
- * A subvention plan might not be the best option if you are paying rent. This is because, if the developer fails to complete the project on schedule, you can be required to pay both rent and EMI.
- * The cost of the property is another negative. Although the sellers may try to entice you with the promise of paying no interest while the building construction is ongoing, the interest rate is added to the total. Subvention schemes significantly raise the property's overall cost, and in the event of a delay, you may pay more than the property's asking price.
- * Some subvention schemes only last for a specific period before the buyer is responsible for paying the interest.
- * The fact that the scheme can damage the buyer's reputation if the developers fail to pay the loan interest is a natural stunner. Therefore, it is essential to do thorough due diligence on the developer and comprehend the terms and circumstances of the scheme
What Should a Prospective Home Buyer Do in this Situation?
- * You may receive recovery notices from banks for pre-EMIs. You must keep paying if you anticipate that the project will be finished in the next six to ten months.
- * You should also take possession of your new property immediately after the builder's default and pursue financial recovery.
- * You should bring up the problems with the bank directly if you cannot pay the EMIs and your project appears to take 4-5 years to complete. Banks have the authority to recoup funds and freeze the assets of defaulters. However, since you are the primary borrower under the tripartite arrangement, you are the one in default in this instance. The Securities Interest Act of Securitization and Reconstruction of Financial Assets and Enforcement (SARFAESI Act) gives banks the authority to sell the assets of loan defaulters to recoup loans.
- * Furthermore, if you have problems with banks, you must visit them and discuss them because failing to reply to the banks' notices is not a solution.
Final Words on Developers Backing Out of Subvention Schemes
A subvention scheme refers to a legal agreement between the buyer, the seller, and then the lender for the home loan. This agreement allows you to apply for a loan to buy a house.
Numerous real estate developers provide subvention schemes. So, it is a decent agreement if you wish to buy a home without stressing about rent and loan-equated monthly installments (EMIs). However, for these schemes, you must select a builder with a good reputation.
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Source: magicbricks.com
Also read: RERA Act Defined & Simplified: Salient Features Benefits
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