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Buying a house on a subvention scheme? Tread with caution written by Preeti Kulkarni ET Bureau, published in The Economic Times. March 11, 2019

With prospects of under-construction properties looking up following the cut in Goods and Services Tax (GST), interest subvention schemes offered by builders through tie-ups with banks are likely to come into focus. Along with discounts and freebies, such schemes could be promoted heavily to attract customers in what is seen as a buyer&rsquos market at the moment.


How it works

Paying a small amount&mdash5-20%&mdashupfront to book an apartment and deferring EMIs till possession will attract prospective home buyers who want to avoid the EMI burden till they move into the house. &ldquoThe target group is home-seekers who are currently living on rent and wish to avoid interest payment in addition to rent,&rdquo says Shaji Varghese, ED and Head, PNB Housing Finance. Such home buyers would find it difficult to afford both rent and interest servicing on the disbursed amount or pre-EMIs, before completion, making subvention schemes useful.


The developers pay the pre-EMIs on behalf of the borrowers until a period specified in the contract or date of possession. &ldquoLoan disbursement is linked to the stage of construction, minimising the risks for banks and borrowers. The developer undertakes to service the interest component of the loan until a specified period. This is an incentive offered to buyers instead of giving an upfront discount on the going rate,&rdquo says D.S. Tripathi, MD and CEO, Aadhaar Housing Finance.


Prior to 2013, when the RBI clamped down on such schemes, the disbursement was made at one go. This put both banks and borrowers at risk in case of delay or default by the developers. At present, it&rsquos the bigger developers who are offering such schemes through tie-ups with banks and housing finance companies (HFCs).


The involvement of banks may be reassuring for you, but ultimately, the onus is on you to repay the loan. Therefore, do the due diligence about the builder&rsquos reputation and project credentials. &ldquoVerify the developer&rsquos track record on completing projects on time, ability to refund in case the exit clause is invoked, required documentation and evaluate the prospects of the project as well as location,&rdquo says Shveta Jain, Managing Director, Residential, Savills India, a real estate consultancy firm. Go through the project details on your state&rsquos Real Estate Regulatory Authority portal to know the developer&rsquos track record on delivery.


While the developer may be picking up the tab for interest payment during the period of construction, you are not getting a free lunch either. &ldquoThe same project will likely have two price points&mdashone with Interest subvention schemes can make buying a home easy for you in the initial stages, but watch out for the pitfalls. Buying a house on a subvention scheme? Tread with caution Regular purchase You can negotiate a higher upfront discount on going rate You have to start servicing the pre-EMIs upon loan disbursal If you live on rent, you will have to pay both pre-EMIs and rent You are in charge of making your EMI payments subvention and another for a regular purchase. Prices could be 7-8% higher in case of the former,&rdquo adds Jain.


There are other conditions you need to watch out for. &ldquoSome buyers could be under the impression that the builder will take care of interest servicing until possession. This may not necessarily be the case. Check whether the developer&rsquos obligation extends till possession or only for a specified period,&rdquo cautions Varghese. In case of the latter, the period could be around 2-3 years, after which, you will have to take on the burden even if the possession is not complete.


Moreover, if you are unable to meet your EMI commitments then, your credit score will be adversely affected despite the developer being at fault. Opt for this scheme only if you are confident of paying EMIs after the completion of the period specified. Schemes where the developer&rsquos commitment extends up to possession are a better bet. &ldquoOpt for schemes where the developer is required to make an upfront payment of the entire interest component to the lender. HFCs like ours insist on such a clause to prevent default,&rdquo says Varghese.


Finally, if the developers renege on their promises, you can seek recourse in RERA. &ldquoThings are better today thanks to RERA. Such schemes can be useful as long as buyers do their basic homework,&rdquo says Jain.