Recently RBI raised caution on banks allowing for home loans such as 20:80. But do you know what risks are there behind such schemes? Why you as an individual buyer should avoid such an offer? Let us discuss it in detail.
What do you mean by 20:80 schemes?
To understand it in a better way, let us say you shortlisted a property to buy worth Rs.1 Cr. So in such schemes you are only paying the 20% of this total value of property means Rs.20,00,000 as a upfront payment. Rest Rs.80% (in this case Rs.80,00,000) will be disbursed to builder by your bank to complete the project. The builder will pay the interest on this 80% of the amount till you get the possession of property. But the EMI will start once you are in possession of the property. So you are buying the property currently by paying just 20% of the value. Rest after the possession. Great !!! But let us go deep into it.
This scheme really works for those who have currently rented house and unable to bear the cost of EMI as well as rent at the same time. Once moving to own a house they can easily manage the EMI as there will be no rent payment from them. But few took the advantage of booking real estate and started to gain the profit. Let us say you booked the property for Rs.1,00,00,000 today by paying Rs.20,00,000. Rest Rs.80,00,000 disbursed by your banker to builder to complete the project within a period. So if we consider that your builder completed the project within the stipulated time say 3 years. Then the property value of today’s Rs.1,00,00,000 will not be same after 3 years. Few started to book this price difference by selling it. So if the property value after 3 years will be Rs.1,50,00,000 then the profit of Rs.50,00,000 within 3 years with the investment of Rs.20,00,000.
The above said story is one side when we consider the buyer perspective. Now let us understand it how this scheme is beneficial to the builder. When builder needs money to complete his project he need to borrow from outside which will fetch him an interest rate of around 15% to 16%. But if get it for around 12% (home loan rates of banks)by such 20:80 schemes then he will save more when it comes to cost on the project. So builders also started to push for such schemes.
This is usually a tripartite agreement between buyer, builder and banks. Where buyer agrees to pay 20% upfront and rest 80% in EMI once property under his possession. The builder will get 80% upfront and agrees that he will pay the interest on that till the property completes. The banker will disburse immediate 80% to builder and start to get interest on that. So all three will be in a win-win-win situation. But…….
Say your builder defaulted in completing the project within a stipulated period, closed his business, unable to pay the interest on 80% within a stipulated period regularly or you have some legal issues after this loan disbursement then who will be responsible for the amount? Buyer, builder or bank? No it is only buyer as the loan will be in his name. So in all probability with 80% of the amount disbursed to builder the risk will be more on buyer than any one else.
Here is the live case of one builder (but not under 20:80 scheme) where the tussle between buyer and builder is going wider and wider day by day. 3 years back in Bangalore on builder announced the lowest price for his apartments which was Rs.14,00,000 (I don’t know the exact size but for double bed room flats). Now the problem is, recently builder sent notice to all buyers asking for another Rs.8,50,000 as the cost of construction escalated. For this builder gave two options either to pay the escalated cost within the stipulated period or cancel the agreement of buying. If buyer agreed to cancel then the builder will pay the amount already paid by the buyer with paying 9% interest on that. But that too once that booked apartment sold to someone or within 6 month period whichever is earlier. The builder is now ready to answer to queries in court if buyer knocked the door of the court. In such a typical condition what the individual will do? How much risky it is to enter into such 20:80 schemes?
This is why RBI cautioned banks to not to disburse such risky loans.