All about Subvention, Construction, Possession linked plans

The home buyers today are being offered several payment plans from the developers while buying a home. They often face the dilemma while deciding which plan is the most suitable for them? Magicbricks explains the different payment plans and their benefits and conditions. 

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The real estate sector has been sluggish for quite some time now given the lack of transaction activity. This has resulted in stagnant prices and large unsold inventory.

The developers have faced repeated calls to rationalise prices to move this unsold inventory but for various reasons, the developer community has refrained from explicit price reduction. Instead of offering price cut, developers have come out with various payment schemes aimed at reducing acquisition cost of the buyer or alleviating his concerns about project delay and attendant financial burden on the buyer.

How much enticing these schemes may appear, it is advisable to read the fine print which comes with these payment plans and fully understand their pros and cons. We look at some of these new schemes and elaborate on their nuances which can help a buyer take an informed decision.

Payment Plans

The prevalent payment plans in the market can be broadly divided into three categories. The same are as follows:

1. Construction Linked Payment Plan (CLP): This is the traditional payment plan where a buyer pays money to developer at various stages of construction of the project. The developer raises demand for tranche payment as the project completed pre-defined construction milestone.
   
2. Subvention Scheme (SS): The ‘no EMI till possession’ plans which are also marketed as ’20:80’ or ’10:70:10’ plan. This involves buyer making a predefined down payment at time of booking while balance 80% or 70% of amount is paid directly by the bank to developer. The USP of this plan is that during the construction period, the pre-EMI is paid by developer, and not the buyer, to the bank.
   
3. Possession Linked Payment Plan (PL): The least complicated of all payment plans; buyer makes a down payment at time of booking an apartment while balance amount is paid only after possession by the buyer.
   

Subvention Scheme and Possession Linked Payment Plans are the flavour of the season as developers try to push sales. We take a closer at them in sections below.

Subvention Scheme

The broad structure of a Subvention scheme consists of following elements:

• Tripartite agreement between a buyer, developer and a bank.
• The bank agrees to directly pay the sanctioned home loan amount to the developer.
• Developer on his part agrees to pay the pre-EMI (Equated Monthly Instalment) during the subvention period on behalf of the buyer.
• Subvention period is the pre-defined period during which a developer agrees to pay the pre-EMI (interest part on the disbursed loan amount) to the bank on behalf of the buyer.

This is not exactly a new product and the payment plan has appeared on the real estate scene earlier as well. Earlier, the practice was for a buyer to make a down payment (say 20%) and the whole of balance amount (80%) was disbursed by the bank to the developer. The main problem with earlier arrangement was Advance Disbursement Facility (ADF) which the banks were extending to the developers. 

The bank disbursed the whole loan amount at one go without linking the disbursement to construction activity. This substantially raised the exposure to both the buyer and bank as the developer got the entire value of the house without corresponding construction activity from his side. This practice of disbursement of full loan amount without linking it to construction activity was stopped by Reserve Bank of India (RBI) in September, 2013 (For more, read here.

Today, the same scheme exists in a slight modification. The main difference is that bank link the disbursement of the home loan to construction activity. Therefore, in a 10:70:10 scheme where 70% payment is happening prior to possession, bank will disperse the amount in tranches linked to progress of construction of the project.

Who gets what? 

The scheme offers incentives to buyers and benefit to the developer alike and this is the reason it exists in the market. The same are summarized below:

Buyer

• Book an apartment by making small initial payment
  
• No payment of pre-EMI during the tenure of subvention period. The amount of pre-EMI paid translates into lower acquisition cost for the buyer
  
• Bank(s) agreeing to subvention scheme for a project means a due-diligence of the project would’ve happened at bank’s level
  

Developer

• Expedite sale in an otherwise sluggish to stagnant market
  
• Simultaneous access to capital at lower interest rate. Not only is developer managing to sell the project, he also gets finance at retail interest rates. Today, home loans are available at sub-10% rate while construction finance would be north of 16%. Provided a developer can get construction finance in the first place!
  
• The project remains debt free as the home loans are on account of buyers and not the developer. The debt-equity ratio of the project remains unaffected.
  

Fine Print

As usual, there are certain ‘ifs’ and ‘buts’ with this scheme as well. And it is advisable to read the fine print before committing to such a payment plan. Some important points which a consumer should keep in mind are as follows:

• Liability in case of default or delay in pre-EMI payment
  
  Consumers need to understand that the loan is on their account. In case, a developer does not pay the pre-EMI on the disbursed loan amount, it shows as default in CIBIL (Credit Information Bureau of India Limited) record of the consumer. This can have serious impact on credit score of the consumer.
  
  However, what is also happening is that banks disburse loan amount to developers after deducting the pre-EMI amount for the subvention period. For example, if the developer raises demand for Rs 30 Lakh and pre-EMI for subvention period is Rs 5 Lakh, the bank disburses only Rs 25 Lakh to the developer. This reduces the pre-EMI default risk. It is advisable to check with your bank on this aspect before going for any such scheme.

• ‘No EMI till possession’
  This is the biggest inducement which attracts buyers to such schemes. But the term can be quite misleading and needs to be understood properly. What the developer proffers is that the pre-EMI during subvention period is paid by them. The tenure of subvention period is same as proposed time required for completion of the project. And this is where ‘no EMI till possession’ comes from.
  
  However, what is does not mean is that developer will continue to pay the pre-EMI even if the project gets delayed. If the project is delayed beyond the subvention period (12-36 months), the onus of pre-EMI falls on the buyer. For true ‘no-EMI till possession’, there has to be an explicit agreement between buyer and developer stating that developer will continue to pay the pre-EMI in case of delay and till possession.
  
  For obvious reasons, not many developers offer such scheme. And even if they do, it is extremely difficult to hold them to the agreement.

The true benefit of subvention scheme comes into play if the project is delivered on time. Therefore, is advisable to opt for project by developers with good track record of project delivery to safeguard against such risks.

•  Getting the correct price – The pre-EMI paid by the developer during subvention period represents cost to the developer. It is one way for him to pass discount to the consumer without explicitly lowering the prices. However, it may also happen that developer may increase the base price (Rs/sq.ft) or add some incremental charges to cover the cost associated with paying pre-EMIs.
  
  Therefore, it is advisable to do a proper check of available prices in the subject project and other projects in the locality to guard against having to pay higher price.
  
  In case of subvention scheme, it is advisable to go for a project where the probability of completion on time is high because only then the scheme makes sense. And please read the agreement terms and conditions to understand aspects related to lock-in period, interest variation etc. on your risk liability.
  

Possession Linked Payment Plan

A possession linked payment plan is a straightforward plan where a buyer pays a certain amount at time of booking (say 20%) an apartment and balance (80%) on possession. In this scheme, the risk is transferred to the builder as it important for him to complete the project to collect the balance 80% amount. Some important points to consider in this scheme are as follows:

• Since the developer is bearing the cost of development beyond 20% amount paid upfront by the buyer, he may try to recover the same by quoting higher price under this scheme. Therefore, it is important to check whether the price offered under PL payment plan and other traditional plan like CL payment plan are same or not. If the price offered under PL payment plan is higher, then developer has already built the cost into the price.
  
• The developer needs to have to have good financial strength to complete the project when balance 80% of project cost has to come from his pocket. It is important to go with developers who have good reputation and can complete the project under this scheme.
  
• There should be only two stages of payment – on booking and on possession. A developer may introduce an intermediate stage before possession and this needs to be understood during due diligence phase itself.
  

Choosing the right plan

Choosing a right payment plan should come secondary to undertaking due-diligence about the developer and project. A good/beneficial payment plan taken for a project which is likely to get delayed will reduce/erode the benefit of the payment plan. Because even in case of Possession Linked Payment Plan, the buyer has to pay housing rent for the intervening period. Not to forget loss of opportunity cost on upfront payment. Further, it is advisable to keep things simple. An upfront cash discount from a good developer may be more beneficial than opting for schemes like Subvention Payment Plan.

Source - TOI