20:80 Scheme a boon for property buyers

Of late we have seen that the 20:80 scheme (subvention) has become very popular with the property buyers. More and more developers are now bundling this scheme with their new property offerings in order to prop up sales in without resorting to price cuts. Thanks to this scheme, the property sales have picked up in otherwise depressed markets especially in the financial Capital – Mumbai.

The 20:80 scheme is an innovative financial structuring where 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. It 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.

This Scheme is very popular with investors as it gives them 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 lacs only and no further payment till possession. The apartment is ready in three years by which time the rate is 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 have worked well for the investors in the past since the property prices have been on uptrend.  However, if the property prices do not appreciate or start falling, the buyer will either have to exit at 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 position to pay EMI post possession, just in case the market conditions are not conducive for exit.

The 20:80 scheme is as beneficial to end users as it is to investors especially in the current market situation where end users are reluctant to buy under construction property due to uncertainty with regard to their completion. This is because 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.

Another big advantage of the scheme is that it facilitates people staying in rented houses to buy under construction property by taking home loan. They could move into their own houses once they were ready and start paying EMIs instead of rent.

To conclude the 20:80 scheme is a win-win for all the players involved the property buyer, the property seller (developer) and the property financier (Banks/Institutions). The property buyer is able to buy the property with limited cash outflow, the developer is able to increase his sales and the bank is able to lend more money.