Developers or builders frequently entice buyers in under-construction or soon-to-launch residential projects by offering a payment arrangement where a small upfront amount is paid, and the remainder is repaid in EMIs to the bank after acquiring possession of the flat. This option, also referred to as a home loan EMI subvention scheme, allows buyers to purchase the property now and pay later.
While the initial appeal of the home loan EMI subvention scheme may seem promising, it can ultimately become a pitfall for unsuspecting homebuyers, particularly if the developer fails to meet project deadlines, a common issue experienced by many in the Delhi-NCR region.
Based on recent reports from The Times of India regarding a Supreme Court case, numerous individuals who had invested in flats under subvention plans in various housing projects throughout Delhi-NCR have reported being obligated to continue paying EMIs despite not yet receiving possession of their properties from developers.
The report highlighted that subvention schemes were intended to simplify the purchasing process for buyers. However, in numerous instances, they were instead utilised by builders as a means to secure loans without proper oversight, ultimately placing the burden on homebuyers in the city. This included receiving demand letters to pay EMIs despite significant delays in the completion of their homes.
The Supreme Court has noted that builders and banks have taken advantage of homebuyers in the past, leading to a proposal for a CBI investigation. As a result, it is advisable for potential homebuyers to exercise caution when considering the subvention scheme.
How EMI subvention scheme work
Typically, when purchasing a flat, homebuyers have two choices: Either pay the full amount upfront or opt for a home loan to finance the purchase.
When opting for a home loan, banks or housing finance companies typically do not offer full funding for the purchase. Generally, lenders approve 80-90% of the flat's cost as a home loan, with the remaining amount to be paid by the homebuyer to the developer.
With this type of home loan, EMI payments commence immediately after the loan amount is disbursed by the lender, regardless of whether the flat is in the possession of the buyer or still under construction.
In the case of an under-construction project, the lender usually disburses the loan amount in stages as the project progresses, adjusting the EMI repayment amount accordingly to provide some relief to the borrower.
EMI payment under subvention scheme
Home loan EMI subvention is a three-party agreement involving the homebuyer, developer, and lender. Initially, the buyer pays a small booking amount, usually 5%-20% of the total cost of the flat. The rest is financed through a loan disbursed by the bank directly to the developer. The developer then covers the EMIs until the flat is handed over to the buyer. The buyer subsequently repays the remaining EMIs or the loan amount along with interest to the bank.
As per the subvention scheme, the flat is expected to be delivered to the buyer within a specified timeframe determined at the beginning of the agreement.
Red flags
When purchasing a flat, the buyer typically pays a small amount upfront to secure the booking, while the builder secures full financing from the bank for the project. Unfortunately, issues may arise if the builder defaults or fails to deliver the project on time, as has been seen with homebuyers in the Delhi-NCR region. Additionally, in instances where projects are completed on schedule, developers often impose a premium fee that further burdens the buyer financially.
Advice for homebuyers
Homebuyers are advised to proceed with caution before committing to any subvention deal. It is recommended that they take the following steps:
Confirm that the project is registered under RERA (Real Estate Regulatory Authority). Ensure that the project has all necessary approvals and a clean record of land ownership. Verify that there are no unresolved legal cases against the project, land, or developer. Review the financial stability of the developer and their track record of completing projects. Thoroughly review the terms and conditions of the subvention scheme, particularly the clause concerning liability in case of project delays or default by the developer. It is advisable to avoid agreements that place sole responsibility for repayment on the buyer.
By taking these precautions, homebuyers can better protect themselves and make informed decisions when considering subvention deals.