At a recent friends’ get together the conversation was centred on home loan EMIs. Most of my friends are married and quite a few of them have been paying EMIs/ pre-EMIs for almost a year now for their under-construction homes (the latter is the interest component one pays on the loan availed on an under construction property). The huge amounts each one mentioned they were paying on a monthly basis left me feeling I should pack up, leave the city and settle down in the mountains somewhere! But as I was travelling home that evening I noticed a hoarding about an attractive payment plan for residential properties being offered by Rajesh LifeSpaces. What followed was a little investigation into what the scheme is about and how it affects both the home buyer as well as the developer.
As one ventures into the residential property market, one is slammed with various schemes offered by different developers. Once you filter through all the noise, clutter and jargon you are left with two major plans: construction linked and subvention plans (few more variants of finance scheme exist, which are out of purview of current discussion). Most of us are familiar with construction linked plans as they have been in existence for a while now and offered by all banks as well as developers. The home buyer puts a down payment on the house at the time of booking and what follows is a series of payouts made by the bank to the buyer and which is passed on to the builder based on certain predetermined construction milestones. In these plans the buyer pays the interest on the loan availed which constitute a substantial portion, at least initially. EMIs or Equated Monthly Installments come into play only after the property is completely developed.
The subvention plan is designed by developers to help buyers, specifically first home buyers and derived from the latin term ‘subventus’ or to help. In a subvention scheme, a buyer needs to pay the initial down payment at the time of booking the flat, in this case, 10% of the booking value of the flat. The buyer also needs to pay the stamp duty and registration for the flat. This is important as the documents serve as proof of ownership and enable the bank to provide the financing for the construction – this is usually 70% of the flat value.
Distinguishing features (how the offer from Rajesh LifeSpaces works):
- The first and most significant difference in a subvention scheme is that the pre-EMIs which consist of the interest component of the loan are paid by the developer till the buyer receives possession for fit-outs of the flat.
- The bank disburses the loan on behalf of the buyer towards the project based on preset construction milestones.
- The final 15% of the flat value is to be paid by the buyer at the time of possession for fit-outs. The bank shall disburse the remaining 5% at the same juncture.
Rajesh LifeSpaces have introduced this plan for a select few of their under-construction projects where as per current construction stages, a buyer under the conventional plan is to pay over 50% of agreement value within few days of booking. These are the current projects where Rajesh LifeSpaces is offering the subvention scheme:
Let’s look at the subvention scheme in the context of Ram, a home buyer of a Rs. 1 crore flat being developed by Rajesh LifeSpaces.
There are some clear advantages of a subvention scheme for a buyer:
- Two year pre-EMI ‘holiday’ is the biggest advantage given the fact that these consist of significant portions of interest in the initial period of paying EMIs.
- These two years gives the buyer time to plan finances while there are no outgoings towards the home loan yet.
- Since the developer is paying the pre-EMI until possession for fit-outs, the onus is on them to be timely with construction milestones and ensure timely delivery of the project.
A subvention scheme is very attractive and useful for home buyers who want to book luxurious homes and also have the additional time to plan their finances to ensure a good life in these luxurious homes. Moreover the finance scheme allows a good entry point for a property investor as well whose initial/ upfront investment is low and in case he is looking to sell it by the time of handover, he can still do so with limited equity investment. Rajesh LifeSpaces is developing some of the most sought after residences in Mumbai’s western and central suburbs. The developer is keen that more people can enjoy its bespoke habitats and a subvention scheme looks like a convenient plan for these buyers to afford such homes.