Bait named Subvention payment plan in Real Estate Market

(1/2/2015 India-as-superpower post) - We all know that Real Estate market of India is going from the most rough phase from last 2-3 years, thanks to recession and downturn in Global economic scenario and economic paralysis created by previous Indian governments by stalling infrastructure projects. This situation is here to stay for another 2-3 years until some demand picks up. This economic slowdown and subsequent decrease in demand of housing sector has forced Real estate developers in India to offer payment plans which act as bait in bringing new buyers to their projects. One of such payment plan which came up during recession time was interest subvention plan or subvention plan.

Now the question arises:

Whom does subvention payment plan help the most?

Any answer....yes the obvious answer to this question is 'Builder' and 'bank' and I would explain the how part of this answer.

Private banking players act smart here as all of the subvention payment plans are financed by Private banks rather then government bank. They have opened up a huge credit market for private banks who are ever desperate for giving credit cards or personal loans or home loans.

Let me explain the working of subvention plan wrto other payment plans and how is it very expensive.

present basic price of flat in Flexi or CLP plan - 2900 per sqft basic rate for subvention plan - 3400 Let super area of flat - 1000 sq ft basic price of flat in Construction Linked Plan or flexi payment plan(excluding any PLC charges, parking charges) - 2900000
basic price of flat in Subvention payment plan - 3400000
difference - 500000 Time frame for which builder pays installment - 3 years Another catch is that in subvention plans prevalent in real estate market is that builder would pay the interest amount to bank for a period of 3 years only. It's damn sure that the possession would not start in 3 years rather going by present construction trend in real estate market, a project takes minimum 5 years for completion(for majority of the builders). Add some 6-1 year of halt period due to any farmer issue, environment clearance issue for particular project etc and it the time could be easily extended by 1 year to 6 years till buyer gets possession. So builder pays interest on disbursed money for 3 years and then according to flat buyer agreement with buyer, the owner starts paying EMI after this 3 year period is over.

For flat of worth 3400000(under subvention plan):
payment schedule - 10:80:10
initial payment by buyer - 10 percent =340000
Bank pays 80 percent - 2720000
Buyer payment(on offer of possession) - 10 percent = 340000
Time lapse between offer of possession and handing over of keys by builder - ~6-12 months.

If any builder offers subvention plan where EMI payable by buyer would start on handing over the keys of flat is much better plan for the buyer as it would save atleast 6 months burden when EMI and rent would go simultaneously.

Carrying on with the example:
Lets consider that a interest demand for 10 percent comes after gap of 6 months. Hence for 1st demand of 340000: Interest part for 6 months for loan term of 20 years: 2975*6 = 17850 (total for 6 months) After next demand is raised: 5950*6 = 35700 (total for 6 months) After next demand is raised: 8925*6 = 53550 (total for 6 months) 1 year of subvention plan is complete After next demand is raised: 11900*6 = 71400 (total for 6 months) 2 years of subvention scheme are complete After next demand is raised: 14875*6 = 89250 (total for 6 months) After next demand is raised: 17850*6 = 107100 (total for 6 months) 3 years of subvention scheme complete Total Interest paid by builder in three years - 374850, therefore excess amount charged from buyer - (500000 - 374850) = 125150. After completion of 3 years the EMI would start which needs to be paid by the buyer, there are good 2 years remaining in actual possession of flat to happen. Hence donot fall into the trap of subvention scheme, instead opt for construction linked or flexi payment plan. Both these plans are almost similar with the only difference is that in Flexi plan initial payment is 10-20 percent(dependent on builder) more then construction linked payment plan. CLP plan is 200 per sqft dearer then flexi plan however.

Another demerit of Subvention payment plan is that it makes 80 percent loan amount mandatory for a buyer(which is again trap by the banks(majority of which are private players with direct setting with builder lobby.

This is my perspective of comparing different payment plans prevalent in India. Other might have an argument that subvention plans is confirmation of house in just few lacs rupees which is is so good deal to resist. But Donot fall into this trap of subvention plans. If you donot have enough money and there is no other option then you should opt for subvention plan which offers No EMI till handing of flat keys and there is no clause in agreement about 3 year time as I mentioned before.