What to keep in mind when considering a 10/90-property payment scheme?
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PROPERTY PAYMENT SCHEME

How does it work?

Everyone with the dream of purchasing a piece of property from a builder would have heard of the ‘No EMI till possession’ statement. Just what does this mean? Understanding this concept best helps you decide if just such offers being provided are worth being considered.

Also known as a ‘subvention scheme’, as a property purchaser you pay 10% of the property value until possession. The interest on the rest of the money arranged is paid by the builder directly to the financier. Customers choosing this opportunity enjoy the added benefits of planning out finances carefully. Customers could choose to keep paying rent until they actually move into their property and then begin paying the EMI upon possession.

Once a homebuyer uses a home loan to purchase property, a legal document known as the tripartite agreement between the buyer, financial institution and seller is signed. This is an extremely important document, especially if one is buying into an under-construction property. This document acts as a safeguard for the homebuyer’s interests and also states, if the borrower defaults on the loan, the property is transferred to the moneylender with the builder having to accept the new owner.

 

Why does it sound lucrative to the buyer?

This scheme becomes extremely attractive for the buyer thanks to the interest-free loan amount they can enjoy till the property’s construction is complete. It works as a guarantee that the builder cannot delay the construction completion with the scheme of things working out in a much more scheduled manner. The longer the builder takes to complete construction, the longer he ends up paying interest for the same time period. With the principal property value remaining the same, the customer is able to enjoy appreciable property benefits. Such individuals seeking to own homes could try this option especially when not being able to afford rent for their current house as well as EMIs.
Scheme advantages:

Key advantages lie in the EMIs beginning only once the possession of property takes place. Here rent stops and you pay EMI instead. When buying a property under construction, customers also benefit from being able to customize their property to certain extent as per their needs.

 

Risk:

There lie multiple risks with the interest subvention schemes:

  1. EMI defaulted by builder negatively impacts the buyer’s CIBIL score: this is the subvention scheme’s biggest drawback. It is not easy to ensure timely payment of EMIs by the builder.  A buyer understands ’10-90 scheme or no EMI for X number of months’ as an “EMI holiday” or ‘Nil EMI payment” for that many number of months to the bank or HFC. In reality, it means the builder needs to pay pre-EMI on the buyer’s behalf. When you hand over your CIBIL score key to the builder, you take large credit risks.
  2. Delay in the project: there lies a misconception that the builder has an incentive to the project on time. In reality, it is the other way around. If there lies a delay in a project, the property cost increases exponentially for the buyer. This will lead to all the benefits of the Subvention Scheme getting wiped off in a few months. Next, when a delay occurs and after the EMI holiday period buyer could find it difficult to pay pre-EMIs. This is a key reason for defaulting on home loans. Usually, builders place the onus on delays to delays in obtaining government approvals for the project. Hence it is advisable to opt for the subvention scheme once all government approvals are in place. While RERA Act imposes penalty for delays, enforcement of these clauses may prove to be difficult and at times counterproductive.
  3. High cost: very few people know that under various payment plans such as construction linked plan and possession linked plan, the property cost differs. The discount or benefit offered under a scheme reflects the same cost already inbuilt in the payment structure of the particular scheme. Hence under the Subvention Scheme, the property cost is one of the highest. Each time you approach the builder, you must keep your cards close to your chest. Focus on understanding all payment plans well.
  4. Scheme agreement – once the tripartite agreement is signed, the builder shares an application form along with a few terms and conditions documents. The majority of the commitments from the builder’s end are oral. Plenty of finer details regarding the scheme are left out of the application form. This gives the buyer the impression that they are getting the best deal in town. The builder is hesitant to share the agreement copy prior to the initial booking amount is paid. The catch lies in the buyer signing without going through scheme details and then crying foul. Remember the entire risk lies with the buyer.

 

How this scheme benefits the builder?

The builder benefits by instead of opting for loans from lenders, builders make use of this option to fund the construction. It also helps in getting new customers immediately. The interest with which builders pay on the property until possession is quite low compared to the loan they receive from commercial lenders. At the time the property is ready, customers are ready to occupy the same, hence the demand and supply stay stable. Builders are able to complete the project paying lower interest on loans taken and then move onto the next project.

 

Conclusion:

Ensure, you as the buyer dig deep into the scheme structure. This helps you understand the terms and conditions of the agreement. Only once all your doubts are cleared will you strike a deal with the builder. Purchasing property is a big investment for a lot of us and the right analysis is required from your end. Ensure a thorough job is done and enjoy your new home!

If you are planning to buy a property sometime soon, RealDocs has created a mobile app that aims to help you determine what documents are required for a particular property based on the type of property, and most importantly, the applicable laws of your state.  Feel free to download the RealDocs app from the Google Play Store, by clicking here.

RealDocs Team