The subvention scheme had been quite a popular trend in residential real estate. While it proved to be beneficial for homebuyers who found it difficult to afford both rent and interest, the developers found it lucrative too and used the same to push their product. It seemed to be a win-win situation as both the parties appeared content.
However, this unprecedented coronavirus pandemic and the subsequent lockdown have not only brought the segment to a grinding halt but also uprooted a lot of things. What will happen to this real estate’s blue-eyed boy in COVID-19 times?
What Is a Subvention Scheme?
Subvention scheme was introduced to push under-construction properties when it was seen that buyers are not interested to invest in such homes as they still have to bear the rental liability along with additional EMIs of the home loan.
Under a typical subvention scheme, homebuyers pay the initial amount, and the bank pays the loan amount to the developer according to the construction stage, while the interest portion on the loan is disbursed by the developer until possession.
In other words, homebuyers are saved from the burden of double impact of rent and EMIs as the real estate developers pay pre-EMIs (equated monthly instalments) on behalf of them for a certain period specified in the contract or the date of possession.
Despite the popularity, subvention schemes often came under scanner. In 2013, the Reserve Bank of India reportedly had advised banks to exercise caution while financing purchases under the interest subvention schemes. Later in 2019, the National Housing Bank (NHB) had asked housing finance companies (HFCs) to “desist” from offering loans under interest subvention scheme after there were complaints of default.
There are fewer launches now under the subvention scheme but there are many buyers whose loans bought on subvention schemes are still continuing.
5 Things Homebuyer Under Subvention Scheme Should Know
With no movement happening in the real estate segment and absolutely no cash flows, some of the developers are expected to default on the payment to banks. As a preventive measure, RBI announced on March 27, 2020 that all banks and NBFCs should be permitted to allow a moratorium of three months on repayment of term loans outstanding as on March 1, 2020.
“In most cases, the force majeure provision would have been included in the purchase document and with builders currently strapped for funds, several developers may find it tough to service this commitment. In fact, some may even decide to default on their interest payment commitments,” Money Control quoted Anckur Srivasttava of GenReal Advisers, as saying.
However, the real estate experts believe that the current cash flow situation in the segment is such that for some of them it may not be a question of willingness to not pay but ability to pay. No wonder if some of the developers even want to scuttle out of the entire subvention commitment period by resorting to the force majeure provision.
In such a scenario, it is the homebuyers who will most probably be left alone to bear the heat. Here are some of the important things homebuyers under subvention scheme must know:
- Subvention scheme comes under term loan as it is part of the homebuyers’ mortgage. As per RBI guideline, banks have to grant a three-month moratorium for buyers and builders if they were to apply for it.
- As per legalities, the developers are liable to pay the compoundable accrued interest post the three-month moratorium.
- Since your present builder-buyer agreement does not cover such a clause, many developers are bringing in force a new agreement which will mention who will bear the additional interest.
- If the builder fails to pay interest, the default interest will accumulate under the home loan and it is the homebuyer who would have to pay the amount post possession.
- In the event of any default by the builder, it is you, the homebuyer, whose credit history is bound to get impacted.
Clearly, the present lockdown times and the subsequent halt in the business is going to badly affect the real estate industry. The default in payment by the cash-starved builders is going to invite litigation in the near future until RERA steps in and declares the three months as a zero period.