The repeated increase in home loan interest rates has resulted in developers and financial institutions quietly withdrawing subvention schemes from the property market for homebuyers. In the past six months, such schemes, which had become one of the popular marketing strategies of real-estate developers, have been mostly withdrawn.
A subvention scheme is a tripartite agreement between a buyer, the developer and the institution providing the home loan. The terms of the agreement give the buyer a break from paying interest on the loan for a specific duration. Prior to release of the sanctioned loan, however, the buyer has to make a down payment to the developer.
Various combinations have been offered by banks and developers, such as 25- 75 (which means the buyer has to pay 25% upfront and the balance on possession), 20-80, 10-20-10-60, and 5-90-5.
Such schemes benefited those who were looking to buy homes but who did not want to pay EMIs until they had taken possession of their unit. Until such time, the developer services the home loan account.
But as the American saying goes, there is no such thing as a free lunch, and the resulting rise in the apartment’s value gets passed on to the end consumer. If the price of a flat opted for with the construction-linked payment plan is compared with that of a similar flat under the subvention scheme, the total amount paid under the latter plan is far more, because the homebuyer has to eventually reimburse the interest paid by the builder to the bank.
Until early this year, developers were advertising their projects with such schemes on hoardings across the Mumbai Metropolitan Region. “With rising interest rates, however, we cannot provide subvention schemes to homebuyers,” admitted Sandeep Runwal, Managing Director, the Runwal Group.
In its latest monetary policy announcement on Sep 30, the Reserve Bank of India (RBI) did not indicate if this would be the last repo rate hike. According to experts, a couple of more rounds of interest rate hikes can be expected.
Since May this year, the RBI has raised the repo rate (the rate at which it lends to banks) by 1.90% over four monetary policy meetings and announcements. As a result, banking and finance institutions as well as developers do not have adequate cushion to offer subvention schemes.
“Only a handful of developers continue to offer subvention schemes,” Pankaj Kapoor, founder and Managing Director, Liases Foras, a nonbroking real-estate research firm, said. “Some are absorbing the impact of the increase in interest rates while others are designing the scheme in a way where the down payment by the buyer is higher than what it used to be. This helps them cut down on the interest rate hike-related risks and sweetens the deal for the customer as there is not much difference in the apartment’s price when comparing between the subvention scheme and a regular nonsubvention offering.”
