Under a subvention scheme, the initial payment or downpayment that a home buyer has to make to buy a property is deliberately kept low to attract more buyers
Residential real estate developers offer innovative schemes to attract home buyers, one of which is subvention scheme or no equated monthly instalments (EMI) till possession. Under this, the developer promises to pay the EMIs (interest component) against the home loan on behalf of the borrower for a specified period or till the offer of the possession is made. While this may seem attractive, the borrower should be aware of all the implications. The biggest pitfall is that the developer may default on EMIs, and impact borrower’s credit score.
Under a subvention scheme, the initial payment or downpayment that a home buyer has to make to buy a property is deliberately kept low to attract more buyers. Usually, developers have tie-ups with various lending institutions to finance the remaining money. A tri-party agreement is executed between the home buyer, the developer and the lending institution. The home buyer pays the down payment, the lender agrees to make the further payments to the developer, and the developer agrees to pay the EMIs on behalf of the borrower till possession or till the time specified in the agreement. In such arrangements, the developer agrees to pay only the EMI; the actual borrower remains the home buyer. However, given the depressed real estate market in which sales are muted and developers are facing severe cash crunch, there is a high possibility of them defaulting on the payments. While the fault may be the developer’s, it will be the borrower—the home buyer—whose credit rating will be affected.
Credit ratings are developed by various agencies based on the credit history of an individual. Banks and other lending institutions look at these credit scores before granting a loan to an applicant. Previous loans, repayment track record and other financial aspects of an individual are taken into consideration by agencies while evaluating her creditworthiness. Not meeting financial obligations such as paying an EMI negatively impacts one’s credit profile. The lower your creditworthiness, the lower are your chances of taking a loan or a a loan at favourable interest rates.
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Projects with subvention scheme are generally priced higher than others in the vicinity. Under-construction projects pose a lot of risk, and if the developer defaults, the home buyer suffers on two fronts. Though such schemes provide financial leverage, consider the details carefully. Make sure the developer’s back ground and financial strength to execute the project and to meet money commitments on time are credible. Stay away from projects with fanciful schemes (for example, recently, a developer was offering a subvention scheme with a down payment of just 2%). Avoid projects by new developers and those located in far flung areas.
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