Finance options for buying a home
Owning a home is dream everyone cherishes. If you are in the market to buy a new house, you can be spoilt for choice. There are numerous offers and schemes being promoted by the developers to attract customers in the current lack lustre real estate market. The cost of property in metros like Delhi, Mumbai and Bangalore has made it out reach of many. This has led to a huge pile up of inventory. As a result developers are offering schemes to attract customers and prevent further inventory buildup.
80:20 scheme
The subvention scheme or popularly known as the 80:20 scheme which was banned by the RBI in September 2013 has made a roaring comeback. Under this scheme a buyer is required to pay 20% of the cost of the property upfront and 80% is funded by the bank. Monthly installments till the possession are borne by the builder. The buyer starts paying the EMI only after the possession is received. For this to happen the buyer, developer and the bank enter into a tripartite agreement. This scheme is not only beneficial to the buyer but the developer as well. The developer effectively gets loan at consumer rate of 10% to 11% compared to 17% or more for commercial loans.
On the face of it, the 80:20 scheme may seem like a win win situation for all. The buyer gets an EMI holiday till completion, the developer gets access to capital at a lower rate and the banks make more by earning interest. However the devil lies in the details. The reason why RBI banned the scheme previously was that the full amount was being disbursed to the developer by the bank at one go creating greater risk for the banks.
What the buyer fails to realize when opting for this scheme is that he will be legally responsible for servicing the loan even if the developer does not keep its part of the bargain. So any delay in paying EMI or failing to pay EMI will adversely affect the Credit rating of the customer.Once an individual’s credit history is impacted future loans may become very difficult to come by.It will take years to repair the damage done. In addition even if there is any delay in completion of the project the buyer will need to start paying the full EMI after completion of EMI deferment as per the original agreement.
A variation of this scheme is where the builder gets into an agreement with the buyer directly without involving the bank. As earlier one needs to pay 20% of the cost initially and the remaining 80% at the time of possession. Since the developer pays the interest initially it is only logical that burden will eventually be passed to the customer. The price offered in this scheme is often higher than what the buyer could have negotiated.
Parallel funding
Under traditional financing the buyer has to put down 20% of the money before a loan is disbursed. Since many find it difficult to come up with this 20% amount, an innovative parallel funding scheme has recently become popular. Under the scheme the buyer may initially pay only 10% of the required amount and the bank sanctions 40%. At a later stage the buyer pays another 10% and the bank disburses the remaining 40%. Depending on requirement and flexibility of the bank several combinations of this scheme can be designed like 15:75:10 or 5:75:15 .
Hybrid Scheme
Another scheme that is currently doing the rounds is a combination of 80:20 and parallel funding scheme. Under this scheme the buyer typically pays 5 or 10% and the bank disburses the remaining 80% during the period of construction . The buyer pays the remaining amount just before possession.
Conclusion
With so many options on offer and limited information about finance a buyer can quickly become overwhelmed. Fear of losing out can make even the most cautious buyer take the plunge without considering the risks involved. While owning a home is a dream for many but you have to carefully analyze what you are getting into so that your dreams do not turn into a nightmare.
