Loans

Why Should You Not Take Home Loans Under Subvention Schemes?

Festive time floods the markets with various discounts and schemes. While every industry is bent upon luring customers with attractive offers to enhance sales, the real estate market is no different. Often customers are easily fooled into such schemes, which though, looks attractive, can adversely affect them in the long run. One such scheme offered by many real estate developers is the subvention scheme. Experts suggest that you shouldn’t opt for a home loan under this scheme. Read on to know more about it.

What Is a Subvention Scheme?

If you have read advertisement slogans like “Buy now, pay later!” or “Pay 10% now & rest after possession” in newspapers or pamphlets, you have already come across the subvention schemes. The subvention scheme is for under-construction properties, where there is a tripartite agreement between the buyer, lender and the house property developer. The borrower pays a small booking amount, which ranges from 5-20% of the property value. The lender then pays the remaining amount to the developer as a loan according to the construction stage. Until the construction of the property is finished, the developer pays the interest component of the loan.

The buyer sees it as a beneficial scheme as they need not pay the interest component until they take possession of the house. It is a profitable investment for developers, as it increases their sale, and is cheaper than other funding methods.

Why Should You Stay Away from it?

Though this scheme looks attractive, it is not always beneficial. Following are some reasons you should not take a home loan under the subvention scheme:

  • Higher purchasing price

You might have to pay a higher value for availing a home loan under the subvention scheme. Developers offer different rates for properties bought under the subvention scheme, which is mostly higher than for a house without the scheme. They do so to recover the cost borne by them to pay the interest of the loan. Therefore, experts suggest that one should carefully check every component of the pricing while buying the property.

  • Risk on your credit score

If you avail this scheme, there is a risk on your credit score. It is because the loan is in your name, and any default on its repayment by the developer can spoil your credit score. Similarly, if the project is delayed or stops midway, you might have to pay both EMI and rent at the same time. Even though the developer is paying the interest component, the onus of repayment is on you, and any default would directly affect your credit score.

While a subvention scheme can reduce the burden of EMI until the time you get possession of the property, there are many risks involved. You might not be able to avail the tax deduction for interest paid on a home loan, as you are not paying the interest. Therefore, you should avoid availing home loans under the subvention scheme. If you avail the scheme, you must ensure to check the developer’s track record to avoid any inconvenience later.

Instead, taking a conventional home loan would prove to be more beneficial & paying your home loan EMIs regularly will help you!