Developers are offering subvention schemes and deferred payment plans. While you should take advantage of them, guard yourself against a few pitfalls.
Recently, while scanning ads placed by developers in newspapers, offers of subvention schemes and deferred payment plans.
What is subvention?
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 instalments to the developer, then the 20% or so that the buyer has to pay is also paid in small instalments 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. "n 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. 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. 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, 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.
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.
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.
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.
Another risk in subvention is that if the developer defaults on interest payment, the buyer's credit record gets marred.
Things to watch out for
Only invest in schemes offered by credible developers, especially those with the financial wherewithal to complete the project. In their desperation to push sales, developers are offering very attractive schemes. Make sure the scheme isn't so attractive that it endangers the very viability of the project. And don't get so blinded by the scheme that you overlook the project's fundamentals, like location, amenities and specifications.
Check the difference in total cost between the subvention scheme and construction linked plan within the same project. The cost is usually higher for subvention schemes. Invest in a project where the difference is minimal or zero.
These plans will not last forever. According to Developers will withdraw all possession-linked schemes 6-9 months from now as the market improves. About 18 months from now, even the subvention schemes will disappear. Take advantage of these offerings, but keep in mind the precautions mentioned above.
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