Subvention Plan
Subvention Scheme is a form of financing for home loans. In this plan, after a property buyer pays the minimum booking amount to the developer and applies for a loan for a property under construction, the buyer need not pay any Pre- EMIs till fixed period or possession i.e., all the interest till fixed period or possession will be paid by the developer.
In essence it is three way agreement between the bank, developer and the buyer. Till a pre-determined time or till possession, the developer pays the interest on the loan to the financial institution/ bank. The buyer starts paying EMIs only after he gains possession of the property.
Benefits to Buyer:
- A pre EMI holiday till fixed period or possession.
- Ideal for buyers living on rent; as double liability of paying rent and Equated Monthly Instalment (EMI) is reduced to only rent.
- An Investor can use – financial leverage – to fund the investment, as the purchaser can pre- close the loan even immediately after the applicable period with sometimes no pre-closure charges.
- The buyer can reap benefits of price appreciation during the construction period.
Benefits to Developer:
- The developer utilizes the funds required for construction at an interest rate on home loan that is far cheaper than the commercial interest rate.
- For cash-strapped developers, the 20 per cent upfront payment gives them adequate liquidity. And there is pressure to execute the project quickly. The remaining 80 per cent is funded by the bank, which creates a bipartite escrow account that keeps disbursing the funds as the project progresses.
- A long term developer would strive to improve credit worthiness with bank and credibility with customers by delivering project on time and use such leverage for future projects.
Bank benefit
The bank gets a pool of customers from a single residential project.
Risk
- In case of unavoidable delay the developer’s credit history gets marred.
- In case the project gets delayed for any reason beyond the subvention period time, the liability of repayment of the loan rests with the property buyer.
