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Sharing the Burden with the Subvention Scheme

Sharing the Burden with the Subvention Scheme

The real estate markets have progressed in different ways. Along with the surge in prices across all markets, have come newer technologies, better offerings, attention-grabbing ideas, pioneering marketing strategies, and several buyer-friendly schemes. One of the most prevalent financial schemes floated currently is the Own Now, Pay Later. Under such a structure, a homebuyer is expected to make a limited payment at the time of purchase, and pay the balance at the time of possession. However, in such competitive economic markets, how do these innovative finance schemes actually work?

Real estate developers come up with schemes that profit the end-user buyers and investors of property. In reality, with such lucrative schemes, the real estate developers have indeed succeeded in enticing more buyers. The standard mortgage finance is structured to offer the customers with increased payment flexibility and lessen the economic liabilities on the buyer. Such financial schemes are known as Interest Rate Subvention Schemes’. Subvention comes from a Latin word that actually means help, aid, support, grant, subsidy, etc. Let us understand this interesting concept further!

Through the interest rate subvention scheme, buyers make a property purchase by putting in only a limited sum upfront. After the initial payment, the buyer needs to make no payment until the time of possession. For example, the homebuyer pays only 20-30% of the price of the property primarily and makes a purchase. The balance amount is paid by a bank to the developer as a loan. Under the arrangement, the bank releases specified payments during the development phase directly to the real estate company and the buyer has to disburse the amount only after he gets the possession. Previously, the developers used to get the full loan amount from the banks up front. However, to curb the derelictions and delays in construction from the developer, in 2013, the RBI ordered banks to link payments with the progress of construction and accordingly release payments in batches.

Alternatively, real estate developers also offer deferred payment plans. These comprise of payments at different phases of construction spread across months or years in various combinations: 10:50: 40, 30:30:40, 10:70:20, etc. This way, the risk of payment is transferred from the buyer to the developer. The buyer, on the other hand, gets ample time to plan his finances and accrue necessary money until the time of possession. All in all, with such schemes, developers succeed in not only attracting the customers to their projects but also help them achieve their goal of owning a house.

It is also important to understand that the subvention schemes can be double-edged swords. Some subvention schemes are for only a limited period, after which the buyer bears the interest cost. In cases of project delays, the buyer may end up paying much more than the price of the property. In addition, in situations when the developer defaults on payment of interest to the bank, the credit-score of the buyer is spoilt and at risk. While being attractive, such schemes should be well-studied and the buyers should make smart judgments after understanding the explicit and implicit terms and conditions and considering factors such as developer repute, his brand value, clause for delay, the developer’s financial strength, bank’s profile etc.

Our experts believe the subvention scheme can be helpful for homebuyers, particularly first-timers, considering that developers deliver timely possessions and include no hidden clauses.

In today’s turbulent times, in all spheres, it is all about subvention!

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GST Impact on Property Prices.

Blog - How GST Will Impact On Property Prices - GharPravesh

The Goods and Services Tax Council has recently reduced tax rates on under construction flats to 5% and affordable homes to 1%. These rates would come into effect from the upcoming fiscal year, beginning 1st April 2019.

As of now, the GST on payments made for Under-construction flats stands at 12% with input tax credit (ITC). The current rate for affordable housing units is 8%.

Additionally, the GST Council also revised the definition of affordable housing to encourage citizens from availing GST benefits. Now, flats costing up to Rs 45 lakhs and measuring 60 sq metres carpet area in metros (Delhi-NCR, Bengaluru, Chennai, Hyderabad, Mumbai-MMR and Kolkata) and 90 sq. metres carpet area in non-metros will fall under the category of affordable housing.

Home buyers are advised to read the fine print

Major concerns making home buyers wary of buying under-construction property are delayed projects and reputed construction companies being involved in fraudulent activities.

While the latest drops in GST rates does spell good news for citizens, there are a few things to consider before celebrating the annfonttypeouncement.

To begin with, these cuts will be effective from 1st April 2019, and not immediately. This means that there won’t be an immediate scramble among buyers to purchase an under-construction property right away.

Secondly, it also depends on whether the cost of construction lowers – and if not, how much of that burden is shifted on to the buyers by the builder. It is understood that the construction costs are unlikely to lower since input tax credits have been disallowed. It is also worth noting that GST rates for some of the raw materials needed for construction have remained the same or are still sky-high.

In the words of Niranjan Hiranandani, National President, National Real Estate Development Council (NAREDCO), “This announcement gives an impetus to the affordable housing and enthuse home buyers to close the sale deals. The GST rate on cement has not been reduced as was expected, at 28% it remains among the highest taxed inputs for construction-and there will be no input tax credit, so developers will face a challenging time.  Also, if the announcement was ‘with immediate effect’, we would have seen sales of Residential real estate units in the current financial year; the w.e.f. 1 April aspect means we will see a rise in sales figures only in the next financial year.”

Going by current estimates, it has come to light that about 90% of the Properties on sale in the market are ready-to-move-in. The remaining 10% share is held by big, reputed construction firms. There were several instances of buyers being unwilling to pay the 12% GST, which led to builders offering discounts on the same in the form of “limited period offers”, and absorbing the cost themselves. This was seen as a good move from the builders’ perspective to sell off any pending inventory, with the buyers benefitting from the move as well.

Thus, to know about the true effects and impact of the slashed GST rates, we would have to wait until well after 1st April 2019 and take stock of the pricing and demand in the housing sector.

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