What is on offer?
Developers are offering three types of plans. The first is a subvention scheme in which the homebuyer pays 10-20% of the price of the apartment at the time of purchase. The balance is paid by a bank to the developer as a loan under a three-way agreement between the developer, the buyer and the bank. While the project is under construction, the developer pays the interest on the loan to the bank. The bank disburses money to the developer as construction progresses. The buyer’s EMIs begin only after he gets possession.
The second scheme is a deferred payment agreement between the buyer and the developer. The buyer pays 5-25% of the total cost at the time of purchase and the balance at the time of possession. Deferred payment plans come in various permutations: 30:30:40, 10:70:20, etc. which involve payments at different stages of construction. A recent innovation is the smart subvention scheme. If the entire payment from the bank has to be paid in 10 installments to the developer, then the 20% or so that the buyer has to pay is also paid in small installments of, say, 2%.
Advantages of these schemes
The biggest advantage of all these plans is that buyers can make a purchase by putting down only a limited sum upfront. After the initial payment, no payment has to be made till the time of possession. “In subvention schemes, with the developer paying the interest on the loan till the time of possession, the buyer effectively saves money on the cost of the property,” says Om Ahuja, CEO, Jones Lang Lasalle Residential.
He also gets time to accumulate money while the project is being developed. Even if he has to take a loan at the time of possession, it will then be for a lower amount. Furthermore, as Nishant Singhal, director-strategy and alliances, Investors Clinic Infratech points out, “Since the buyer’s EMIs begin only after possession, he is able to avoid a situation where he has to pay both rent and EMI simultaneously.”
Development risk gets transferred entirely to the developer in these schemes. “If the developer delays possession, he has to bear the interest burden for a longer period or he gets the balance payment at a later date,” says Singhal. In deferred payment plans, where the buyer puts up only 5-25% of the cost of the house upfront, his risk gets limited to that amount. “If the developer doesn’t complete the project, the buyer loses only the booking amount,” says Ahuja.
Smart subvention schemes have come as a boon for buyers who don’t have much savings but whose salary levels are quite high. “These schemes are for people who may not be able to pay 20-25% of the cost upfront, but can afford to pay 2% or so of the total cost after every few months,” says Mudassir Zaidi, national director-residential, Knight Frank India.
Risks and disadvantages
In a subvention scheme, your contract with the developer should say that the latter will pay interest on the home loan till the time of possession. In a deferred payment plan, your final payment should be made at the time of possession. A couple of years ago, developers had offered subvention schemes where they offered to pay the interest cost for a fixed period, say, 24 or 36 months.
“When the project got delayed, the buyer had to start paying the EMI even before he had got possession of his apartment. He thus ended up bearing the burden of both rent and EMI simultaneously,” says Singhal. Don’t jump headlong into deferred payment plans where no bank is involved and the developer bears the entire cost of development by himself. “Such schemes highlight the developer’s desperate financial situation,” warns Ahuja.