How does interest subvention benefit a property investor

If one picks up the newspapers to figure out where to invest one’s hard earned money, one would probably not consider real estate seriously owing to multiple reports of the recent slowdown in this sector. However, such reports are far from the truth. Real estate in India has seen some much much-needed reforms, which aim at bringing in genuine transparency in its operations and the future is looking quite bright. In fact, now is as good a time as any to invest in a property, if one is looking for genuinely good returns.

This brings up another question: where should one invest? In the post-demonetization era and after the Goods and Services Tax (GST) and Real Estate (Regulation & Development) Act or RERA have come into effect across the country, it’s best one invests in a project by a reputed institutional player, with has a proven record of delivering quality projects on time. It is such projects, which are prime candidates for good price appreciations in the future as trust and transparency become key factors for any home buyer, be it an end-user or an investor.

In order to entice property investors, who are undecided on where to put in their money, some reputed developers are coming up with attractive financial incentives, such as new interest subvention schemes. We look at these schemes and how these could benefit an investor in getting a property at a relatively low initial investment, which would enable him or her to cash in on it at a later stage to get the good returns he/she desires.

For the purpose of explaining the benefits of this subvention scheme, we shall take the example of an hypothetical premium project by a reputed developer located in the fast developing millennium city of Gurgaon in Haryana.

How an investor normally pays for a property

For an investor, the process of purchasing a property is similar to that of an end-user, wherein he/she decides on a property and pays a certain percentage of the total amount (15-20%) as a down-payment, with the remaining amount being paid by means of a home loan. This loan is generally from a bank or a housing finance company, which releases payments to the developer as per the progress in the construction of the project.

For an investor, the most important aspects are a low initial investment, lower financial burden owing to EMI and rents and the promise of good returns over and above the total investment made by him/her in the property (after covering for the down-payment, loan amount and the interest payable on the loan). Under the normal system described above, the investor needs to cater for a large portion of his/her earnings to go into payment of EMIs on the apartment as well as rent at the place he is currently staying in. To achieve this, one needs to make many sacrifices and adjustments to one’s lifestyle to be able to manage their financial situation, over the period of construction. In other words, there is plenty of short to medium term pain to be borne for the possibility to good returns in the future.

How the subvention scheme helps

Let’s come to our example of this premium Gurgaon project by a prominent developer in an emerging part of the city. The developer comes up with a subvention scheme, whereby as earlier the investor needs to make a down-payment of say 10% of the total cost of say Rs. 2.5 crore (which comes to approx. Rs. 25 lakh), with the home loan paying for the remainder till the possession date, which is say 3 years from now. However, the point of difference comes in the treatment of the EMIs on an apartment in this under-construction project. The developer, rather than the investor, pays all the EMIs till possession.

Interest subvention scheme for investors (Image credit: Deccan Chronicle)
Interest subvention scheme for investors (Image credit: Deccan Chronicle)

Considering that for an investor, the EMI is the biggest expense he has to incur, this comes as a much-needed relief. While the benefit of a low initial investment remains, one also does not need to bother about having to set aside huge funds towards EMI payments. In addition, assuming an average home loan interest rate of 16.5% over three years, one can save anywhere from approx. Rs. 16 lakh to Rs. 32 lakh in interest costs alone. Hence, an investor and his family can maintain the same standard of living, as earlier and in this interim period, gather enough savings to comfortably pay off the remainder of the loan.

By the time possession comes along, the investor can expect the value of the apartment to have appreciated significantly and by selling off the project, he/she can look forward to making massive gains, while being spared of the medium term trouble he/she had to bear earlier.

Indirect benefits of subvention for an investor

So far, we have focused on the apartment itself. However, a project does not come up in a vacuum, but are accompanied by matching improvements in the transport and social infrastructure around the project. If say, a new highway or metro line comes up near the project in our example within these 3 years, the connectivity to one’s office, the Metro and the Delhi airport will improve greatly. This will attract schools, hospitals and offices to the area, which would increase the attractiveness of the project.

This, in turn, will create greater demand for the project, pushing up the prices of apartments here significantly further. It is here that the investor stands the chance to make even greater returns.

Conclusion

The success of any investments depends upon making the right choice at the right time and price and then, waiting for stuff such as construction and infrastructure to fall into place. With the subvention scheme relieving one of financial stress, it is a welcome way for an investor to make hay in the real estate market, which remains one of the most lucrative investment destinations available.

The information has been curated from various sources and may not be verified as per RERA guidelines *
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