Subvention Scheme: What Is It, How It Works, Importance, Benefits And Drawbacks
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6 May 2022Ever seen hoardings or advertisements for different real estate projects with taglines, ‘buy now pay later’ or ‘pay just 10% now and the rest after possession’? These advertisements are an example of a subvention scheme extended by developers to maximise their sales.
If you are looking to buy a property, you must learn about subvention scheme. Here’s what it means, how it works, uts importance, benefits and drawbacks. Read on!
What is a Subvention Scheme And How Does It Work?
Subvention scheme is a 3-party agreement between the buyer, builder and lender. When a buyer books a property, he/she pays 5%-10% of the money upfront. The bank pays the remaining amount to the developer as a form of loan. The bank disburses this loan to the project developer once the construction proceeds.
However, an important aspect of this scheme is that the developer carries the interest cost until the possession date or a fixed period, as mentioned in the terms and conditions.
Importance of Subvention Scheme In Real Estate
The bank subvention scheme for property eases the financial burden on prospective property buyers since they do not have to pay EMIs and pay for house rent while the new property is being built. In addition, since the developer pays the interest on a loan, it gets an incentive for timely construction completion. This lowers the chances of delay in possession.
Difference between Subvention Scheme and a Subsidy
A subsidy is typically a grant, which the government offers to increase consumption and production. When it comes to subsidies, the government pays a part of the cost of certain services and goods.
Meanwhile, a bank subvention scheme provides some sense of financial relief to homebuyers for a certain period but does not offer anything for free.
In simple words, the primary difference between a subsidy and a subvention scheme is that the former removes a part of the cost, whereas the latter delays EMI payments.
What is an Interest Subvention Scheme?
‘Subvention’ means financial support. Thus, a subsidised interest subvention scheme is offered by the government under bank subvention scheme. Primarily, interest subsidies are provided to support the growth of specific sectors in the economy. It ensures that borrowers do not have to pay the entire interest amount on a loan. As such, the government pays the remaining interest amount.
Thus, an interest subvention scheme is a type of concession of interest that works towards the benefit of particular sectors.
Also Read: A Quick Guide To Home Loan Application Process
Why Was Subvention Plan in Real Estate Banned?
The National Housing Bank (NHB) decided to put an end to home loan subvention scheme in 2019. This decision was taken to prevent the occurrence of fraud in the real estate sector. Various developers used the money from banks for other types of businesses and significantly raised the property’s value way above the market trend.
However, this decision received substantial backlash from real-estate developers due to concerns over liquidity crunch, and eventually the fall of the real estate sector.
If we talk about the short term effects, then a ban on subvention scheme will lead to a decrease in property prices. Thus, a larger section of the society would be able to afford to buy properties. This would be beneficial for large housing firms.
Benefits of Subvention Scheme
With a subvention scheme for home loan, you get the option to pay some money upfront, and the remaining payment can be made after possession. Thus, it provides the following benefits:
- It lifts the financial burden and leaves enough time for you to collect the required amount.
- It is especially beneficial if you want to purchase an expensive property as you do not need to pay the entire sum beforehand.
- In addition, a subvention scheme is also beneficial for developers as it increases their sales.
- The interest rate that a buyer needs to pay is also lower than regular home loans.
Drawbacks of Subvention Scheme
A subvention plan for home loan also comes with its own set of drawbacks, such as:
- Since you are the property owner, if the developer fails to pay the interest, it is you who will have to face all consequences.
- Most properties under this scheme are substantially expensive.
- Non-payment of interest by your developer can lower your credit/CIBIL score.
Should You Opt to Invest in Housing Loan Subvention Scheme?
You might consider investing in this scheme if you live in a rented property as it will help you lower your financial burden. In addition, consider choosing this scheme if you earn a high annual income.
Additionally, consider checking the builder’s credibility before proceeding forward to invest in an interest subvention scheme for a housing loan. Ensure that the chances of construction delay are low from the developer’s end.
Also Read: Home Loans Tax Benefits: Exemptions Under Section 80C, 24(b), 80EE, & 80EEA
Final Word
Subvention scheme has its own set of advantages and disadvantages. As a prospective homebuyer, you must check the distinctive features and merits of this scheme before making a decision. Talk to a lending expert to know if the benefits of opting for a subvention scheme would outweigh the disadvantages and vice versa.
FAQs on Subvention Scheme
Ans: Before you invest in a subvention scheme, ensure to examine the financial stability of your developer and make sure that the developer has certain crucial clearances. Most importantly, you must be well aware of the terms and conditions before signing the contract.
Ans: With this scheme, more and more buyers want to purchase a property as they do not have to bear any financial burden initially. This boosts property sales, benefitting the builders and developers of a real estate project.
Ans: Indian MSMEs can claim interest subvention upon meeting the eligibility criteria. Following this, such enterprises will be eligible to receive interest relief on outstanding loan amounts at 2% p.a. Further, such businesses can also claim interest subvention for their entire working capital or term loan amount of up to Rs. 100 lakh.
Ans: SIDBI or Small Industries Development Bank of India implements this scheme. That said, all lending institutions must submit correct data and inspect interest subvention schemes. Further, all nodal offices must submit half-yearly claims to SIDBI as per guidelines.
Ans: Apart from extending subvention schemes, builders also provide various other attractive offers, such as club membership waivers, freebies and discounts, cash waivers and much more. These offers and discounts are especially prevalent during festival seasons.
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