What is 20:80 scheme
Subvention or 20:80 scheme is an innovative financial structuring which involves purchasing of under construction, property directly from the developer with financing from the bank / institution. Under this scheme, the property buyer has to pay only 20% of the cost of the property upfront and the balance payments are to be made in installments only after possession.
The subvention scheme is a variation of the normal home loan scheme, whereby, up to possession of the property, the EMI for the loan is paid by the developer instead of the buyer.
How 20:80 scheme works:
The developer approaches banks/financial institution with the project which he wants to offer under the 20:80 scheme and gets the same approved
The developer then bundles this scheme with the property and offers it to potential buyers
The buyer purchases the property by paying just 20% of the total cost
The buyer gets a home loan approved for the balance 80% from the bank
The bank disburses the home loan amount to the developer at agreed intervals on behalf of the buyer
The developer pays the EMI on home loan to the bank, instead of the buyer, till possession
After the possession, the buyer starts paying EMIs to the bank
ADF is key to the 20:80 scheme
Now days, most of the developers are using the 20:80 scheme in combination with the ADF (Advance disbursement Facility). In case of normal home loan, disbursement is made by the bank to the developer in installments linked to construction. In case of ADF, a large part of loan say 80% to 90% is disbursed in advance, ahead of construction.
Benefits of 20:80 for Home Buyer
a) End user
One of the biggest advantages of the 20:80 scheme is that it puts pressure on developer to complete the project one time since they have to pay EMI till possession. Any delay in completion would result in increased cost for them. Hence this reduces the execution risk to a large extent
It facilitates people staying in rented houses to buy under construction property by taking a home loan. They could move into their own houses once they were ready and start paying EMIs instead of rent
b) Investor
20:80 Schemes are very popular with investors as it gives them the opportunity to increase their gains on property investment exponentially due to leveraging it offers.
For e.g. under this scheme, apartments in Andheri (Mumbai) are offered say @10,000 psf. A 2 BHK apartment measuring 1,000 sq. ft. Would cost one crore for which the buyer will have to pay 20 losses only and no further payment till possession. The apartment is ready in three years by which time the rate – say 15,000 psf. The buyer now sells it for 1.30 cores thereby making a profit 30 lacs on initial investment of 20 lacs. This works out to whooping 1.5 times in 3 years.
Such schemes works well for the investors in the past since the property prices have been following the upward trend. However, if the property prices do not appreciate or start falling, the buyer will either have to exit at a loss or hold on to the property and start paying the EMIs. Hence one should be cautious and invest in such scheme only if one is in a position to pay EMI post possession, just in case the market conditions are not conducive for the exit.
Benefits of 20:80 to Developers
The biggest advantage of 20:80 schemes is that developers can avail of ADF and draw down the entire (or substantial) portion of the sanctioned loan up front instead of in installments linked to construction. This provides the much need liquidity to the developers.
It also helps developers to prop up their sales without resorting to the price cut.
What to watch out for
While on the face of it 20:80 scheme looks very attractive, one has to scrutinize the terms in detail and study the fine prints to see if there are any hidden costs involved.
The main USP of the 20:80 scheme is that you don’t have to pay any EMI (interest cost) till possession. One needs to see if the developer is bearing this cost in full or passing it on to the buyer by increasing the price of the property. Taking the example referred to earlier if the property rate in Andheri East is 10,000 psf and the developer is selling at the same rate under the 20:80 scheme, then it would be beneficial to the buyer. But if is selling at a higher rate say 12,000 psf then he is passing on the interest cost to the buyer. Also if the developer is availing ADF, his interest cost would be higher in which case he should be willing to bear the same.
Some developers offer 20:80 schemes under which they agree to pay EMI only for a specified period of time say 2 years from the date of purchase instead of from the date of possession. In this case, the EMIs would start immediately after 2 years irrespective of whether construction is completed or not
It should be noted that it’s the buyer who takes the loan and is ultimately liable to repay the same. Further, although the developer promises to pay the EMI till possession, if he defaults, the bank has right to recover the same from the buyer even before possession.
If the project gets stuck, the buyer will still be liable to pay the EMI/Loan to the bank
Due to ADF, a substantial part of the loan is disbursed to the developer at a very early stage of construction. This increase the risk of the lender as well as the borrower
Another point to be noted is that under the ADF, since the largest part of the loan is disbursed upfront, the interest cost during the construction will be higher. Under normal circumstances, this should not impact the buyer since the developer is paying the EMI till possession..
Considering all this, it would be advisable to go for 20:80 scheme wherein the property is being offered at close to the prevailing market price and the buyer has to start paying EMIs only after possession.
A note of caution and Outlook on 20:80 scheme
The key element of 20:80 schemes is ADF. As we have seen earlier in case of the ADF substantial amount of loan is disbursed to the developer at a very early of construction. In the past, banks have been very cautious in extending this facility to developers because of the potential for diversion of funds and only reputed developers with a good track record we’re able to get this facility.
However, of late we have seen that banks have become very liberal and have been extending this facility to all kinds of developers even those without a track record.
Also it has been seen that it is mainly investors who are availing of the 20:80 scheme and taking leveraged positions on the property. If things continue this way, it may lead to a bubble kind of situation.
Hence it’s likely that RBI may advise banks to exercise caution and go slow on the ADF to developers thereby taking the sting out of the euphoria of 20:80.