All About Subvention Loans

By | June 10, 2015


Salman Khan must have been super relieved when the verdict was announced. And so were all of his die-hard fans.

Suraj and Nikita, were just as relieved when a Subvention scheme swooped in to save their day!

They were planning to buy an apartment in Delhi and they zeroed in on a property with a completion date 3 to 4 years away. But, after paying a rent of Rs.18000/- per month, they couldn’t afford the Pre-EMI on a home loan. Here’s what helped them out.

What’s a Subvention Scheme? 

Under a subvention scheme, you can buy an under construction property from the builders by paying 15% to 25% of the total cost of the property, or even lesser. The remaining cost of the property is paid by the bank directly to the concerned builder and the pre-EMI interest is paid by the builder to the bank, as per the agreement.

Here in our case, Suraj is buying the apartment for Rs.75 lakhs. He makes a down payment of Rs. 10 Lakhs to the builder. And he goes for a bank loan for Rs.65 lakhs. Assuming the project is scheduled to be completed within 48 months (4 years), he will owe the builder around Rs.135416 per month.

As the bank disburses each installment, they charge pre-EMI interest on it. So, in Suraj’s case, he will pay around Rs.88000 for the first year as Pre-EMI and for the second year, it will double. Suraj’s home loan EMIs begin after he gets possession of the apartment.

If they take a subvention scheme, this pre-EMI amount will be paid by the builder to the bank, and the bank will disburse the remaining amount directly to the builder.

The way it works

Usually banks offer subvention scheme only for the builders that are listed as Category A with them. Those builders who have their project finance with the same bank and those with a clean financial record will be considered for this scheme.

There will be a three-way agreement between the developer, the buyer and the bank. Often there will be a specific period till which the builder agrees to pay the amount.

Banks pay the amount to the builder upfront or as installments under a deferred payment scheme.

Which banks offer Subvention schemes?

Subvention schemes are available with most leading private and public sector banks and NBFCs. But it is completely up to the discretion of the credit manager to offer this scheme with a builder. The scheme is also limited to a few developers. So, if you would like to opt for the scheme, you may need to check with the bank as well as the builder about the tie ups or possibilities.

Why say ‘Yes’ to Subvention loans?

Taking a home loan with a subvention option comes with a number of advantages for both the buyer and the builder. Some of the major benefits are:

  • Subvention loan schemes allow customers to own homes with a minimum upfront payment and it thereby reduces their financial burden.
  • The buyer needs to pay no interest till a fixed period or till the time the possession of the property.
  • Due to the interest burden, the builder is likely to complete the project well in time, making it a win -win situation.

Why say ‘No’ to Subvention loans?

This scheme is however not completely free from risks.

  • The buyer remains as a ‘borrower’ in the bank’s record. If the builder delays the interest payment, it is the buyer’s credit profile that gets negatively impacted.
  • Builders usually agree to payment of interest for a specific period only. As soon as the subvention period ends, the borrower has to pay the remaining interest, plus dues, if any. And if the construction is delayed further, they become helpless.
  • Builders are likely to increase the price of the property if it is known that the buyer is planning to go for a Subvention scheme. This is to make up their loss of interest payment.
  • Most subvention schemes come with a lock-in period which makes it difficult for you to dispose the property in case of any emergency.

A Subvention scheme was the rope that pulled Nikita and Suraj out of their quagmire, and it could help you too. Now they can go for as many Salman Khan movies as they like, without the worry of budgeting and spending less.


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