Reading in between the Lines of Subvention Schemes

Ever noticed the end note of a Mutual Fund advertise showcased on TV; a voice overplayed at 2x speed stating the disclaimer? Probably you must have noticed while contemplating on switching the channels or waiting for the show to continue. But did you ever pay careful attention to it? Heard each and every word? If not, here is what it says, “Mutual Fund investments are subject to market risks, read all scheme related documents carefully.”

But if I don’t even pay attention to the speeded garbled disclaimer, will I actually take the time to sit and read long boring offer documents?

For most the answer is “no”, isn’t it?

Yes, it is boring but what if I tell you it pays off to do so, and not just mutual fund or insurance but all finance related documents, especially property loan-related offer documents. Reading the fine print pays off. And if one can read in between the lines, nothing like it!

How?

It gives you valuable knowledge and knowledge is the power that you can use to leverage your situation.

Take Subvention Schemes for example - More commonly known as no-EMI-till-possession Scheme never fail to attract home buyers. And why not? A scheme where all buyers have to do is pay 10 to 20% of property value upfront and the rest amount is paid by the bank in installments to the developer under a three-way contract between the buyer, developer, and the bank. While the developer bears the interest until the project is under construction, the buyer’s EMI starts only after he gets the possession. A scheme too good to be true, isn’t it? You are right to have your alarm bell ringing.

Subvention DOES NOT help cut costs. Pre-EMI that a developer bear is merely an extension of interest that the developer pays on behalf of the buyer. The buyer still ends up paying the entire amount of EMI calculated on the basis of his loan as the principal amount remains the same. Under all the gloss, Subvention schemes are like any other construction linked scheme with the added benefit of the time value of money. Meaning that it helps home buyers buy time to pay off. In fact, Subvention schemes are prices at a lower discount as compared to other construction linked plans.

So how do I make good out of this scheme?

There is still hope to make the best out of this scheme. How? By knowing more about the scheme. Remember knowledge is power.

I. Subvention schemes are of three types

1. No Interest till possession

2. Time-bound meaning the developer will bear the interest till a decided period eg 18 months contract

3. A shared interest in a certain ratio between the buyer & developer

Amongst the above, only no interest until possession is beneficial to the buyer. Rest bear the possibility of raising the ticket price if the construction gets delayed.

II. Subvention schemes are most useful to those paying rent as it saves them the dual burden of EMI and rent at the same time.

III. The ratio of the three-way agreement should be such that the buyer has to pay the least down payment. If the down payment is more than 20% then the scheme is not worth the cost put in.

Lastly, the credibility of developers matters most. If the developer delays in payment of Pre EMI, it directly impacts the credit score of the buyer.

Having said that, subvention schemes are not all that bad provided you take the above factors into account. But now let's talk about the elephant in the room - Down Payment. While the subvention scheme handles the home loan, aworking-class Indian still struggles to buy home and one of the biggest obstacles is accumulating enough savings to pay down payment.

India’s first Down Payment Assistance Program to rescue

HomeCapital’s home down payment assistance program facilitates interest-free loans almost equivalent to the contribution towards the down payment. What this program does is provides immediate liquidity to book your dream home. The buyer will repay the same in installments until the possession is given. So by the time home loan, EMI starts the buyer has already paid off down payment assistance, leaving him free of the dual burden. A win-win situation!