Opting For Interest Subvention Schemes? Keep These Factors in Mind
With the real estate sector facing a slowdown for the past two years, developers have been coming up with lucrative schemes to attract buyers. Among these are interest subvention schemes. PropGuide explains what these schemes are and things you should keep in mind before going for such schemes.
What is an interest subvention scheme?
Interest subvention schemes are offered by builders for under-construction projects. Under an interest subvention scheme, a home buyer pays an upfront amount, while the rest of the loan amount is directly paid by a bank to the developer. At the construction stage, the developer pays the interest on the loan; the equated monthly installments (EMIs) will kick in for the buyer only after the home comes into possession. The loan will involve a tripartite agreement among the buyer, banker and the developer. As these schemes especially help those who do not have huge savings, they are apt for young working professionals.
While these schemes can help you in your home purchase in a big way, here are a few things you should take care of before going for such schemes:
Cheap? Not quite
There is every chance that the home you are getting through an interest subvention scheme is more expensive when compared to a normal deal. While it may look cheap, the developer might end up charging you for the entire interest payment and more. It is tough to spot the correct pricing, as the complicated payment schedule requires complex calculations. To avoid these, approach the developer or property advisor to collect information on the payments for all the plans. Find out about construction-linked plans, interest subvention schemes and a plain buying approach. Get all the schemes vetted through a chartered accountant or someone experienced to get an idea of the total payment. It would give a better idea of the benefits of the scheme.
Credit score at risk
Under these schemes, the developer is party to the loan agreement. If a developers defaults on the payment, the Credit Information Bureau (CIBIL) scores of buyers will get affected, bringing your own credit scores at risk. This will, in turn, impact your own loan taking capability. It is also tough to keep track of the interest payment of developers. Ensure that you pick a reliable developer. Also, cross-check the financial condition of the developer to bring down the chances of credit risk.
Tax troubles
The taxation process of these schemes is not yet clear. The interest on initial years is paid by the developer, so who gets taxed for it or how will the exemptions work is a very blurry area. If the Income Tax Department classifies payments made by the developer to the bank as 'income', the home buyer might end up paying the tax.
Binding agreements
The agreements of this kind are complex in nature with reams of terms and conditions. A few such interest subvention schemes also have lock-in periods enforced by the developers. Such conditions might end up in stuck investments and tough terms of ownership. Make sure that you spend enough with a good legal consultant to vet all the agreements before you sign them.
Getting away with delays
At the outset, it looks that the onus is on the builder to cut delays in project execution. However, there have been cases of builders delaying projects, using Force Majeure or Acts of God clauses. In such cases, the interest payments to the bank might stop and the burden will be transferred to the home buyer. Make sure that the project and its approvals are in place before you consider the scheme.