20:80 Payment (Subvention) Scheme

There is a very attractive payment option in the real estate market especially for under construction properties. Lots of customers are confused about this20:80 Payment Scheme and are not aware fully about the benefits of the scheme. You know that sales of residential property are down in any city when builders start widely advertising their 20:80 schemes. Clearly, 20:80 schemes are launched by builders as a sales promotion tool. So does that mean that 20:80 schemes are always beneficial for consumer or investor? That would broadly be true if you are in the market to buy an under construction property.

What is 20:80 Payment Scheme:

Subvention or 20:80 scheme is an innovative scheme which involves purchasing of under construction property directly from the developer with financing from the bank. NormallyICICI and HDFC Bank are the few banks who can give this payment facility. Under this scheme, the buyers has to pay only 20 percent of the cost of the property and the balance payment is to be made in installments only after one gets the keys to the flat after possession. The 20;80 scheme is a little different from the normal home loan scheme, where the EMI for the loan is paid by the developer instead of the buyer.

20:80 How it works for all the Entities – Buyers, Builders and Banks:

a) The Builder ties up with banks/financial institution with the project which he wants to offer 20:80 scheme and gets the approvals.

b) The Builder then bundles this scheme with the property and offers it to the buyers.

c) The buyer purchases the property by paying just 20 percent of the total cost of the flat.

d) The buyer has to get loan approved for the balance 80% from the bank according to their Financial Standing.

e) The Bank gives the loan to the developer at agreed time frame on behalf of the buyer.

f) The Builder pays the EMI on home loan to the bank, till possession of the flat

g) After the possession of the flat, the buyer pays EMI’s to the bank in 10 years, 15 years or 20 years payment scheme.

Benefits of 20:80 Subventions for Home Owners:

a) End Users:

Advantages of the 20:80 payment scheme to the Buyers is that it puts pressure on Builders to complete the project on scheduled time since they have to pay EMI till possession. Delay in completion would result in increased cost for the Builders. So the Delays in constructions are checked upon. People can stay in rented houses to buy under construction property by taking a home loan. And move into their own houses once they were ready and start paying EMIs instead of paying rent.

b) Investors:

20:80 subvention scheme is popular with investors as they get opportunity to increase their gains on investment due to leveraging it on offers.

Such schemes works well for the investors in the past since the property cost is been following the upward trend of Increase.  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. Some builders are offering 2 years of locking period.

c) Benefits of 20:80 to Builders:

The Advantages of the schemes is that builders can avail of ADF and draw down the entire portion of the sanctioned loan up front instead of in installment linked to construction; this gives the much need funds to them. It also helps developers to prop up their sales without giving discounts to the customer. 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. It is likely that RBI may advise banks to exercise caution and go slow on 20:80 schemes and most probably soon will make 25:75 as a norm to help end users to invest in the property market.