What is a home loan EMI subvention scheme and how does it work?

When selling flats in under-construction or yet-to-be-launched residential projects, developers or builders often try to lure buyers by offering them to pay a small amount upfront and repay the remaining cost of the property as EMIs to the bank after getting possession of the flat. This type of 'buy now, pay later' option in homebuying is also known as a home loan EMI subvention scheme.

Although the home loan EMI subvention scheme sounds good at the outset, it may lead to a trap, especially when the developer fails to deliver the project on time, as the experience of thousands of homebuyers in Delhi-NCR shows.

As per an ongoing case in the Supreme Court reported recently by The Times of India, thousands of homebuyers, who had booked flats under subvention plans in various housing projects across Delhi-NCR, have alleged that they were forced to pay EMIs by banks even as they were yet to receive the possession of their flats from developers.

While the Supreme Court has observed that these homebuyers have been taken to ransom by builders and banks and proposed a CBI probe into the matter, future homebuyers should exercise caution regarding the subvention scheme before opting for it. Here’s an explanation of how it works.

But first, let’s look at how the buying process typically works in a standard situation, i.e. without subvention.

Generally, homebuyers have two options while booking a flat: Either pay the entire sum from their own pocket or get the purchase financed through a home loan.

While taking a home loan, banks or housing finance companies do not provide 100% funding for the purchase. Generally, lenders approve 80-90% of the flat's cost as home loan while the balance amount is to be paid to the developer by the homebuyer.

In this type of home loan, the EMI repayment starts immediately after the loan amount is disbursed by the lender, irrespective of whether the flat is in your possession or still under development.

In an under-construction project, the lender generally disburses the loan amount at different stages of the project and the EMI repayment amount is adjusted accordingly, providing some relief to the borrower.

EMI subvention works differently

Home loan EMI subvention works as a tripartite (three-party) agreement among the homebuyer, developer and the lender. A buyer is allowed to pay only a small booking amount, generally 5%-20% of the flat's total cost at the beginning. The remaining amount is covered through a loan, which is disbursed directly to the developer by the bank. The developer repays EMIs of the sanctioned amount till they hand over the flat to the buyer. The buyer then repays the remaining EMIs or loan amount + interest to the bank.

Under subvention scheme, the delivery of the flat to the buyer is generally supposed to happen in a duration agreed upon at the start of the agreement.

This scheme appears like a win-win for both buyers and builders. While the buyer gets to book a flat by paying a small amount at the outset, the builder gets the full cost from the bank to finance the project. However, trouble can start if the builder defaults or fails to deliver the project on time as experienced by homebuyers in Delhi-NCR.

Moreover, in cases where projects are completed on time, developers typically charge a premium that increases the financial burden of the buyer.

Laws regarding housing loan EMI subvention schemes aren't very clear. However, regulatory bodies like Reserve Bank of India, and the National Housing Bank, have intervened in this matter from time time to regulate subvention plans.

What should homebuyers do?

Homebuyers should exercise extreme caution before signing on any subvention deal. They may take the following steps:

• Ensure that the project is registered under RERA (Real Estate Regulatory Authority).

• Check that the project is clean in terms of approvals and land ownership.

• Check there are no pending cases against the project, land or the developer regarding the project.

• Take a look at the financials of the developer and their project completion history.

• Lastly, the buyer should thoroughly read the terms and conditions of the subvention scheme, especially the shifting liability clause. One must avoid signing on a deal that puts the whole liability of repayment on the buyer in case of project delay or default by the developer.