Is it a good idea to buy house using 20:80 loan scheme?

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If you happen to drive through the busiest road of the city or a highway, you can’t miss the big hoardings put up by real estate companies attracting prospective home buyers with the interest subvention schemes, popularly known as 20:80 schemes. Although the Reserve Bank of India has directed banks not to finance such schemes, real estate companies have tweaked the schemes a bit to evade scrutiny.

What is a 20:80 scheme?

Under these schemes, the buyer books an under-construction property by making a down payment of 20% of the cost of the property and takes a home loan for the rest of the amount. But instead of the buyer bearing the interest cost of the loan, the builder pays the interest till he gives the possession or for a particular number of years. So, a buyer will be able to book Rs 1 crore property for a sum of Rs 20 lakh and get a loan of Rs 80 lakh from the bank. The builder would bear the interest cost on the Rs 80 lakh loan till he gives the possession.

The new avatar

In their earlier form, these schemes were extremely risky as the builder was getting the whole cost of flat upfront. Seeing the inherent risk in the property, the RBI advised banks not to give loan under such schemes.

However, the builders have found a way out by offering these schemes with some changes.

1.Now, the bank has linked the disbursal of the loan to construction phases. Earlier, the builder was getting the full amount upfront. This was highly risky for the buyers as in the absence of a regulator, many builders were utilising these funds for other projects and delaying the construction.

2.The bank does not make the payment directly to the builder. Now, the buyer will pay the EMIs and get the interest part reimbursed from the builder.

3.The builder is coming out with even more lucrative schemes offering the buyer to pay as low as 5% as booking amount and rest on possession.

Are these schemes beneficial?

If implemented properly and honestly, these schemes are beneficial to all the parties. The builder gets finance for its project at lower rate through the buyer, and the buyer doesn’t have to bear the burden of both rent and EMI. He gets to book the flat by paying just 5%-20% of the cost of the flat.

Disadvantages of such schemes

However, the disadvantages may outweigh the advantages of these schemes. The price of the flat will be higher as the builder has already accounted the interest cost in the price of the flat. If the project gets delayed, the buyer will end up paying more in terms of interest, increasing the overall cost of the property. Suppose the builder promises to pay for the interest for 3 years, and in case of delay in possession, the buyer will have to bear the burden of both rent and EMI.

It would not be a surprise if the builder goes back on its promise and does not pay the interest after some time. There is always a risk that the builder may not reimburse the interest part to the buyer.

In some cases, the builders put in clauses forbidding the buyer to sell the property before the possession. So, you may not be able to exit from such property if you want to.

When should you go for such schemes?

On the face of it, the schemes are attractive and you may find it hard to ignore them. These are ideal for those people who can’t pay both EMI and rent together. Apart from the interest burden being shared by the builder, the buyer is also likely to benefit from the increased property prices by the time construction gets over. If you are confident that the builder will deliver the project on time, then only you should go for such schemes. Always do a thorough background check of the builder and be sure about the financial position of the builder before entering into any such schemes.

Avoid buying from new builders. Read the fine print carefully before entering into any agreement with the buyer.

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