Real estate investments keep launching fancy financing schemes. However, it is important to keep in mind that only the right financing can make any real estate investment lucrative. To put in simple words, a wrong financing can end up giving luckless results. Real estate developers keep launching different types of financing schemes to persuade home buyers. One of these schemes that are extensively in use is the subvention scheme. Many first-time buyers avail this scheme to get their dream home. However, they are not alert of the several drawbacks of this type of financing.
Subvention Scheme: What is it?
To put in dimple words, in subvention schemes, the buyer pays the margin money. Subsequently, the bank disburses the complete loan amount and credits it to the developer on the same day. Yes, you read it right. The developer gets the full amount on the same day. However, in return, the builder consents to shell out the interest accrued on loan to the bank on behalf of the borrower. Consequently, the developer gets the entire money upfront. In fact, the buyer owns nothing more than an agreement.
Subvention Schemes: Why Builders Push?
In a subvention scheme, there are three stakeholders; the buyer, the bank, and the builder. The builders push buyers to avail this scheme as it gives the former the spur to deliver possession on time. This is because he could be relieved from paying the loan interest on behalf of the home buyer.
On the other hand, we need to understand that most developers have heavy debt burdens. Hence, their balance sheets are already filled with a lot of debt. Banks refuse to offer more debt. Therefore, the builders borrow money on account of the buyer. The bank denies lending the builder at a lower rate of interest. However, banks don’t mind lending a buyer depending on their credit rating. It won’t be wrong to say that to some extent developers are being forced into these schemes as banks won’t lend out to them otherwise.
Disadvantages of the Subvention Schemes
The scheme may ease the home buyer’s loan interest load. However, it doesn’t come at no cost. In fact, the developers include the interest that they pay to the property cost. Consequently, there is a possibility that developers charge more than what they actually pay as interest.
In case the developer fails to pay the agreed interest to the bank on time, it can leave a negative impact on the credit score of the buyer. This is because it is in the name of the buyer that the loan was sanctioned. Most importantly, once the credit score gets damaged, the banks would severely limit the borrowing capacity of a loan seeker for a long term.
Besides, home buyers are at the mercy of builders. If the latter divert funds to another project leaving their projects; they get stuck. Most importantly, in a tripartite agreement, developers may not make full revelation of terms and condition. At times, they only mention the cursory points to draw home buyers. It is exceedingly essential that buyers enter into an agreement only after reading all terms and condition carefully.
At times, builders market that there would be no EMI till possession. However, in the agreement they mention a cut-off date. This relates to a ‘projected possession’ date. Hence, even if the buyer does not get possession, his EMIs start after the mentioned date. Therefore, it is better to carefully scrutinize the use of tricky words in the agreement.
The interest is paid to the bank on the buyer’s behalf. Besides, builders include any and all costs to the final price of the property. It is therefore, important to confirm if the buyer can get tax benefits from such an arrangement before agreeing to the scheme.
To Sum up
To put in simple words, good old-fashioned financing practices are tried and tested ones. People practiced those for decades. Subsequently, the best way to buy a home is to avoid any complicated financing deals.
This blog intends to inform you the concept and shortcomings of the subvention scheme.
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