The new-look of 20:80 Home loan schemes

20:80 Scheme is the home funding scheme which the builder offers for his under-construction property whilst the buyer buys it with only with 20% down-payment and the promise from the builder that he will not have to bear the interest of the housing loan he takes from the lender, till the property is ready for possession or any other specific timeline that is agreed between the builder and the buyer.

In this scheme
The builder was happy receiving the proceed in advance which helped him construct without any shortage in cash-flow,
The buyer was happy getting the house free of any financial outflow till possession, &
The lender was doing high-volume of business by tying up with various builders who were offering 20:80 products to speed up their sales.

But the The scheme was, however, banned by the Government in September 2013 citing the following issues:
1. The buyer’s credit history may get affected if the builder fails to pay in time.
2. Builders are getting leverage of extra funding before they are actually constructing the property which may enhance the risk-proposition.

However, the news is: A way around has been developed keeping the above two issues in mind and the scheme still is in effect with some alterations.

The Alterations are :

1) Instead of the builder paying directly to the lender, the buyer pays the Pre-EMI to the lender and the builder either reimburses the buyer or pays the amount in the buyer’s bank a/c in advance making arrangement for the debit.
2) The 80% money payment in advance to the builder has stopped and it is now paid in tandem with the construction stage only, reducing the risk of upfront funding. The construction stage is verified by the lender every quarter, before fresh disbursement of funds. However, the purchaser must understand that the payment of interest by the builder has already been factored in the price per square foot.

But there are some advantages and disadvantages in the above scheme such are :

Disadvantages are :

1) The buyer pays for the interest subvention payment too, via escalated pricing offer.
2) If the property doesn’t turn up to be ready for possession in time and the builder has offered only time-bound relief on the Pre-EMI(interest) payment to the lender, the buyer will have to start paying the interest which could be till undefined period of time. 3) In the event of the buyer wanting to sell it (because he is unable to bear both rent and Pre-EMI), there could be a clause by the builder that one can not sell the apartment before the property is ready for possession.
4) There is likelihood that the property has too many units and for some reason the builder is not confident of selling it quickly and hence offering the scheme.

5) Since the lender will hold back approximately 5% of the loan amount till possession has been given by the builder, they may not allow the buyer to start repaying the loan partially without downsizing it. Many complications can arise at this point.

Advantages :

1) Investors get return on 100% of the property cost by investing only 20%. So the effective profit margin goes up.
2) The end-users can enjoy interest free loan till possession and avoid having double expenditure of both rent and Pre-EMI.
3) The stocks sell out faster for the builder and with assured liquidity, they can construct faster which is good for buyers.
4) Lenders book bulk business in advance with assurance of retention of the loan and without having risk of foreclosure as the borrower does not opt out of the property since the tab is picked by the builder and selling may not be allowed under the builder’s terms & conditions.
5) The overall real estate market looks up with such schemes which interests buyers more than a regular offer in the market. The positive vibes create happiness amongst all involved and if things end up well, it is a win-win for all the parties.