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    Tread cautiously when dealing with subvention schemes offered by real estate developers


    Since developers are independent entities, they are free to create schemes within the allowable legal framework.

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    With NHB ban in place, evaluate legal compliance before signing up.
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    The National Housing Bank (NHB) in July asked housing finances companies to stop offering interest subvention schemes through developers. Now, some developers have come up with their own offers. Typically these involve the buyer making a small upfront payment and rest at possession. There are also builders who are offering to pay you ‘rent’ for booking flats in their under-construction projects. “Some banks continue to finance such schemes as they are not bound by the NHB circular,” says Vipul Patel, Founder, MortgageWorld. in, a mortgage advisory company.

    As a new customer, if you opt for a builder’s scheme that involves paying 9-20% up front, with the balance being funded by your independent loan at the time of possession, you don’t risk any violation. If a lender is involved at inception, you need to be cautious. “After the NHB ban, some builders are offering to reimburse the interest to the customers instead of the lender,” says a senior official of a large HFC.

    Ban impact limited
    Source: ANAROCK Research, for April-June 2019

    Borrowers should look at agreements carefully. “Since developers are independent entities, they are free to create schemes within the allowable legal framework. The borrower should take legal and tax advice before signing up,” says Patel. Though the RBI has not issued a circular on the lines of the NHB in the recent past, it had red-flagged the 20:80 or 5:95 schemes in 2013. After this, banks switched to construction-linked disbursals for such loans. Given the discomfort of regulators with such products, the concept remains a grey area. “It is wise to avoid interest subvention schemes at the moment,” says D.S. Tripathi, MD and CEO, Aadhar Housing Finance.

    Borrowers who have already signed up for such schemes face a bigger dilemma. The NHB circular covers not only new products, but also the ones already on offer. Even if you had signed a contract before the diktat came into effect, you could still be left in the lurch. “In case of a delay in construction, the lender can withdraw from the agreement as the disbursement is construction stage-linked,” adds Tripathi. In such cases, borrowers will have to approach the builders to review the agreements.

    For the amount already disbursed, however, the circular will not be applicable. “The lenders will have to continue with subvention for the disbursements already done before the new regulation came in,” says Shaji Varghese, ED and business head, PNB Housing Finance.

    How scheme worked and what happens now
    The erstwhile proposition
    • Homebuyers paid a small amount-5-20%-upfront to book under-construction flats
    • Once the loan was sanctioned, borrowers did not make payment until possession or specified deadline
    • Developers serviced interest on behalf of borrowers in the interim

    NHB’s diktat
    • No new loans to be disbursed under interest subvention schemes
    • Order applicable to loans that are sanctioned but yet to be disbursed
    • HFCs to review existing subvention schemes being offered
    (Click here to know how to save on taxes for the financial year 2020-21.)

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    1 Comment on this Story

    Praker 555 days ago
    Do not fall into trap of developers and builders.. free bee or low bank interest is not a solution.. ask for lower price. Realestate will anyway fall as India’s current housing prices are now more expensive than those during Japan’s property bubble, and are close to U.S prices just before the global financial crisis exploded. So wait if you are not getting right property at affordable price to you.. Never ever go for huge bank loan and subsequent debt trap.
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