Avoid new versions of 80:20, 10:80:10, 2:92:6, 6:88:6, 10:10:70:10 schemes

 

In case of project delays, the entire EMI burden might fall on buyers' shoulders

Gold coins and jewellery were not the only things aggressively marketed this Akshaya Tritiya. Real estate developers were also pushing new variants of the once-frowned-upon 80:20 or 75:25 schemes to lure property buyers.

Some of the schemes include variants such as 10:80:10, 2:92:6, 6:88:6 and even 10:10:70:10. Experts suggest such schemes are nothing but 80:20 or 75:25 schemes - scrapped by the Reserve Bank of India (RBI) in 2013 - in a new avatar.

Under such schemes, buyers can purchase properties with financing from a bank. A small upfront amount is paid by the buyer to the developer. The developer, then, pays the equated monthly instalment (EMI) for a specified period of, say, two or three years, or till the buyer gets possession of the property. This works under a tripartite agreement between the buyer, the developer and the bank.

For example, under the 10:80:10 scheme, a popular scheme being pushed these days, buyers will pay 10 per cent of the apartment cost at the time of booking and additional government charges such as value added tax (VAT), service tax, and stamp duty. The developer will pay the EMIs to the bank until the time of fit-out or possession. The buyer then needs to pay the remaining 10 per cent at the time of possession.

These schemes are used by developers to manage their cash flow. Developers get a funding at 10.5-11 per cent instead of the 18-19 per cent they would otherwise have had to shell out. "These schemes are a good means to attract buyers in a depressed market. Buyers benefit as the upfront payment is small and they can save on interest cost for one-and-a-half to two years," says Ashutosh Limaye, head of research at JLL India.

"Such schemes can be good if the project is two-three years away from completion and all the necessary approvals are in place," says Mudassir Zaidi, national director (residential agency) at Knight Frank. However, the irony is that such schemes are typically available only for projects that are just launched or in the early stages of construction.

Scheme design

Buyers might need to be aware of gimmicks and additional costs associated with such schemes. For example, an advertisement of a township in Palghar, a town close to Mumbai, says ready-possession flats are available for Rs 18.11 lakh including stamp duty, registration, VAT and service tax. Customers just need to pay 10 per cent down payment and would get 90 per cent in bank home loan. The marketing executive, however, reveals the home loan will be on agreement value, which will be Rs 14.5 lakh. The buyer needs to pay the remaining money of about Rs 3.6 lakh partly in cash and cheque.

Another advertisement for properties in Pune and Goa markets a 10:70:10:10 scheme. The sales staff says the payment will be in four tranches. A customer will need to pay 10 per cent upfront to book the house, while the housing finance company will release 70 per cent in loans. The customer will be charged EMI on this amount. While taking the keys, the customer will need to pay an additional 10 per cent and the lender will release the remaining 10 per cent to the developer. The customer's EMI will go up in the same proportion.

Downsides

Developers have a tendency to jack up prices of properties where such schemes are applicable to cover their cost of paying interest. So, if the property is available at, say, Rs 4,750 a sq ft, the developer may sell the flat at Rs 5,000 per sq ft under this scheme. "Buyers need to check the rates for the flat/s if they do not opt for the scheme and compare it with those when the schemes come into play. In all likelihood, the rates are likely to be different as the developers will try to recover the interest payment from these higher rates," says Limaye.

These projects are prone to accelerated disbursements. There may be cases where only 50 per cent of the construction is complete but 80 per cent of the disbursement has taken place through banks, according to industry observers. "If the borrower or customer wants to exit at this stage, he will have to find a buyer who is ready to pay 80 per cent upfront for a 50 per cent completed property. Also, all the transfer charges will be on the completed value of the property," says Divakar Vijayasarthy, co-founder, MeetUrPro.

For example, if someone had purchased a property at Rs 5,000 a sq ft with a three per cent exit fee and he exits the project when it is 50 per cent complete, he ends up paying an exit fee of Rs 150 a sq ft (three per cent of Rs 5,000) on an investment of Rs 2,500 or 50 per cent of the total cost, amounting to an effective exit fee of six per cent.

If the developers delay, the entire burden of the loan falls on the shoulders of the buyer who is yet to have the house. In case of default, there could be further complications. "The developer may be bearing the interest burden, but the loan is taken in the name of the buyer. If the developer defaults, any delay or default will appear in the credit report of the buyer for no fault of his. The buyer will also be forced to pay interest once the specified period expires even though the property is still under construction," says Vijayasarthy.

Tax Angle

Since these schemes are applicable for under-construction projects, buyers will not be able to take the tax benefit immediately. The deduction for the interest paid up to Rs 2 lakh for a self-occupied property during the pre-construction period can be claimed in five equal instalments commencing from the financial year in which the construction of the property has been completed. However, if the property is not constructed within three years from the end of the financial year in which the loan was taken, the interest benefit would be reduced from Rs 2 lakh to Rs 30,000.

Last Word

According to Harsh Roongta, director, Apna Paisa, the original 80:20 schemes had no home loan component. "In the original 80:20 scheme, buyers had to pay 20 per cent upfront and the rest on possession. The scheme was later tweaked to bring in the home loan component. Buyers should not opt for schemes if the loans are involved or where they come under any sort of liability," says Roongta.

(Source : Business Standard)