Understanding the Concept of Interest Subvention on Housing Loan
The word subvention means an aid or grant or subsidy. Usually, this subsidy or aid is granted by the government. Loans with subvention plan provide a subsidy to the borrower, reducing the amount of interest they have to pay on the loan by a small percentage.
Subvention Loan Definition
Subvention scheme loans were first conceived by the Government of India to provide some relief to borrowers and to encourage certain industries. The government provided subvention on interest for loans like agricultural loans, certain housing loans, and educational loans, on loans sanctioned under the subvention plan, the government would pay a small percentage of the interest on the loan, beginning from 1% of the interest.
For housing loans, subvention plan is offered to help middle and low income sections of the population to fulfil their dream of owning a house. Under this scheme, the government offers a subsidy of 1% of the loan interest for housing loans up to a certain limit. This scheme was devised to help both buyers and developers.
Later on, the idea of interest subvention was picked up by real estate developers and many leading developers established a tie-up with banks and other financial institutions to offer their own version of interest subvention on Home Loans. If you plan to buy a home, Bajaj Finserv offers advice on things to consider before investing in real estate, and on choosing the tenure of a Home Loan.
What is a Subvention Loan in the Context of Buyer-Financial Company Tie-Ups?
The recent real estate slump has resulted in a lot of setbacks for real estate developers. In a bid to attract more buyers, some developers associated with finance companies to offer Home Loan subvention plans. This scheme benefits all parties – buyers, developers, and financial institutions.
Under this kind of Home Loan subvention scheme, the buyer pays 20% of the cost upfront, while the bank or the company granting the loan pays 80% of the cost directly to the builder as the project progresses. The builder pays the Pre-EMI on the loan, thus relieving the buyer of a part of the interest they have to pay on the amount they borrowed.
The Benefits to Buyer, Builder, and Finance Company
The Buyer :
For the buyer, they get an EMI holiday for a certain defined period or until they take possession of the property. The builder also pays the Pre-EMI or the interest on the loan for a specified period. Because a bank or a reputed financial company is involved, it also serves to provide further assurance that the project will be completed without any hitches as the builder has to adhere to the scheme’s terms to sustain their relationship with the bank or NBFC.
For the Builder :
In the current scenario of a very sluggish real estate market, the subvention scheme on Home Loans helps attract more buyers. The builder has to pay part of the interest on the loan, but this interest rate is much lesser than interest rates on commercial loans. The tie-up with financial institutions also helps provide more credibility to the developer and brings in more buyers for those projects.
For the Finance Company :
The company or bank that offers the loan gets more customers. As developers have many units to sell in a single project, this translates to multiple loan applicants. So the subvention plan on Home Loans also benefits the lender.
Even in these times of a slowdown in the real estate market, most people still aspire to buying their own house. Innovative ideas like Home Loans with interest subvention can motivate many of these potential buyers to actually take out loans and pay for houses being built by developers. Home Loan interest rates add to the burden on borrowers. The idea of a pre-EMI holiday, having the builder pay a part of the interest on the loan, can prove to be a very attractive prospect to buyers.
Many banks and finance companies allow customers to apply online for a Home Loan. So, what used to be a tedious process involving a lot of trips to the lending company has now become simple and easy. Just log on to the company website and start the process of applying for a Home Loan. Once you submit the documents needed and get the loan approved, you can quickly be on the way to owning a home. Bajaj Finserv offers Home Loans with attractive interest rates, and other unique features.