Innovative financing schemes: How home buyers will gain?

Paresh KariaEasy2ownEstateThe residential property market has seen a significant slowdown in recent times. While the buyers have been waiting on the sidelines hoping that the prices will correct, the developers are reluctant to bite the bullet fearing that this may lead to a further correction. The slowdown in sales has also affected home loan disbursement by Banks/Housing Finance Companies (HFCs) thereby impacting their revenues and Balance Sheets as well. In order to boost sales, the developers and Banks/HFCs have come together to lure property buyers by offering them attractive financing schemes. Let us see some of the popular schemes on offer and understand how they will benefit the home buyers.Subvention Scheme:The good old subvention scheme also known as 20:80 scheme continues to be popular among developers as well as home buyers, especially investors. This scheme is a variation of the normal Home Loan, under which, the property buyer has to pay only 20% of the total cost and avail loan for the balance 80%. However, unlike the conventional Home Loan, under this scheme, the EMI for the initial period of 2 or 3 years or till possession (as per the terms of the scheme) will be paid by the developer and the buyer starts paying EMIs only thereafter. Thus, in this way, the developer is bearing the interest cost on home loan during construction period instead of the buyer.However, before jumping into the scheme, the buyer must compare the property rate offered by the developer with those prevailing in the market to see whether the developer is actually bearing the full interest cost or passing whole or part of it to the home buyer by way of higher property price. One should also check the discount the developer is willing to offer in case the buyer does not go for subvention scheme.Parallel/Pro rata fundingParallel funding or Pro rata funding is now becoming very popularity especially among developers and Banks/HFCs. Under the conventional Home Loan, the buyer has to first make his contribution of 20% before the bank can disburse loan. Thus, for a property costing one core, the home buyer must have at least twenty lacs of his own funds immediately available.  Many times, this acts as a limiting factor. The objective of parallel funding is to reduce this initial burden on the buyer thereby making it more attractive for him to buy the property. Under parallel funding, the bank will disburse the loan amount in proportion to the buyers own contribution. This means that initially the buyer may have to pay only 10% and the bank will disburse 40% and then buyer pays the next 10% and bank will disburse the balance 40%.  Several combinations of these disbursement ratios like 15:75:10 or 5:75: 15 etc. can be worked out depending upon the buyers’ requirements, lenders flexibility, construction stage etc.Combination of aboveIn these trying times the developers and Banks/HFCs have devised innovate financing structures using the combination of subvention and parallel funding in order to woo home buyers. These combinations are targeted towards achieving twin objective of reducing the initial contribution requirement (via parallel funding) as well taking away the burden of EMI during construction period (via subvention).

Typically under such scheme, the buyer has to pay say 5% or 10% and the bank will disburse the loan for the balance 80%. The Balance 15% or 10% will be paid by the buyer just before possession. Also the buyer will not have to pay EMI till possession.Subvention by developer without loanAnother scheme which is being offered by some developers is a variation of the subvention scheme discussed above. It is similar to the subvention scheme except that it does not involve any home loan. The buyer has to pay only 20% of the total cost and the builder makes demand for the balance 80% only on possession.

Thus as can be seen from above, there are many attractive financing schemes available and the home buyer is in a sweet spot. It’s up to him to select the scheme best suited to him or bargain for a discount with the developer in lieu of the schemes. However, he will have to act fast because once the sales pick up the developers may start withdrawing the schemes. It is also possible that to discourage speculation, the RBI puts restrictions on such schemes.