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Are ‘book now, pay later’ schemes profitable?

“Under the subvention schemes, the banks/financial institutes disburse 80 per cent of the value of the property to the company and instead of passing the payment discount to the customer the company pays the pre-EMI (interest) component to the bank on behalf of the customer for the specific period as per the subvention scheme plan,” explains Sadhawa N Mishra, partner, SNG & Partners, Advocates & Solicitors.

Subvention schemes are beneficial for those looking for shelter and can’t afford to pay EMIs and the rent, together. “As property buyers need to start paying only at possession, this comes as a win-win situation for both buyers as well as developers,” says DK Agarwal, CMD, SMC Investments and Advisors Ltd.

Under the subvention schemes, in comparison to the construction link plan (CLP), the developer gets the total amount upfront for the property. “The developer pays the interest on the money paid by the bank on behalf of the buyer, till the period of subvention,” says Atulay Nehra, advocate.

Experts believe that the way the schemes are marketed and proposed to the investors, they look extremely lucrative. However, there are certain known and unknown risks attached:

Advantages:

EMI Holiday - The schemes give investors an EMI (Equated Monthly Instalment) holiday typically for a period of 24 months or till possession of the unit, whichever is earlier

Limited risk - In such schemes, exposure of the investor is limited to only 20 per cent of the unit value till possession or 24 months, reducing the risk of investing in an under construction project

Quality assurance - When banks are involved, it ensures that the customer’s investment is safe

Small booking amount – Buyers are benefited as the builder ensures timely delivery of the project to decrease the interest rate burden on their financials

Penalty charges – Some developers claim they would pay any penalty charges in case of delay in possession

Disadvantages

Limited EMI holiday – Subvention schemes come with a lock-in period or a mentioned time period of 24 or 36 months – i.e the developer will pay interest on EMIs only till the period of subvention. After the subvention period buyers will be paying the EMI to the banks, whether construction is completed or not or whether possession is handed over or not.

Credit score – If the developer delays the EMI payment during the subvention period, the credit score/CIBIL rating of the home buyer gets impacted

Lock-in period - Investors should always check the applicable lock-in period for these schemes as it may restrict them from selling the unit in the open market

While such schemes may look good at a first glance, the fact is that if the project is delayed the buyer will end up paying much more than the original loan amount. Therefore, one should do their research before choosing a project and a developer. It is important to look at the developer’s track record of delivery, construction quality of existing projects and after sale services.

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