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Is it good to buy a house under the 80:20 Loan Scheme?



Buying your own home can be quite costly these days. Apartment prices being sky high in metros like Mumbai, are out of reach of the common man. This is when you come across some interesting hoardings by some developers and real estate Companies, enticing you to buy that dream house, using a very attractive loan scheme. The 80: 20 loan scheme.

What is the 80: 20 loan scheme?

If you want to purchase an under construction apartment, you pay 20% of the cost of the apartment, as a down payment. You avail a home loan from a bank, for the remaining 80% of the amount.The apartment you buy is an under construction apartment. You have to pay EMI (Principal + Interest), on the home loan availed, only on possession of your apartment.Till the construction is complete, you will have to pay only the Pre-EMI. This is the interest portion on the home loan amount, which has been disbursed by the bank.Banks disburse loans for your apartment as each stage of construction is completed. Interest portion that you pay on the disbursed loan amounts by the bank is called Pre-Emi. In the 80: 20 loan scheme the builder agrees to pay the interest, till you get possession of the apartment or for a certain number of years. If you buy an apartment for INR 50 Lakhs from the builder, under the 80: 20 loan scheme, you will have to pay INR 10 Lakhs as a down payment. You would avail a home loan for INR 40 Lakhs. The builder would pay the interest on this home loan called Pre-Emi, until you get possession of the apartment. Here’s the bad news… RBI scrapped the 80: 20 and the 75:25 loan scheme, way back in September 2013.

Why was the 80:20 loan scheme scrapped?

  • Under the 80:20 loan scheme, the builders would pay back the interest on the home loan; you/customer availed from the bank, until possession of the apartment. If the builder defaulted/ did not repay the interest, your credit score was affected, as the home loan was in your name. You would become a defaulter on the home loan.
  • In the 80:20 loan schemes, you would pay 20% of the cost of the apartment as a down payment to the builder. You then avail a home loan for the remaining amount. The bank would disburse the remaining 80% to the builder as each stage of your apartment is constructed. The builder benefits as he gets the money at a lower rate of interest, as the home loan is in your name. If the builder has to borrow money from the bank for his projects, he will be charged a higher rate of interest. The problem here was that the banks would disburse the entire 80% of the cost of your house, initially at the time of construction itself, to the builder. The builder could easily divert this money to his other projects which are pending, due to lack of funding.

The 80:20 loan scheme makes a comeback

Yes…The 80:20 loan scheme and its cousin the 75:25 scheme, has made a comeback under a new avatar, the 10:80:10, 2:92:6, and even 6:88:6 loan schemes. Under the 10:80:10 loan scheme a very popular scheme, you/buyer would pay 10% of the cost of the apartment at the time of booking, along with the service tax and stamp duty.The builder would pay the interest to the bank on your home loan, till you get possession of the apartment. You/buyer would pay the remaining 10% at the time of possession of the apartment.
The builders are using these new avatars to escape the net of the RBI.

  • Earlier banks would disburse the entire 80% of the cost of your house (loan amount), at the time of commencement of construction itself to the builder. The builder could easily divert this money to his other projects which are pending due to lack of funding. Now banks disburse the loan amounts to the builder as each stage of construction of your apartment is completed.
  • Earlier the bank would disburse the loan amount directly to the builder. Now banks do not disburse the loan amount directly to the builder .You/buyer will pay the EMI’s and the builder will pay you/buyer back, the interest component of the EMI.
  • The builder offers the buyer very lucrative schemes where the buyer pays just 5-6% of the booking amount and the rest of the amount is paid when he takes possession of the apartment.

What are the advantages of these loan schemes?

If you are staying on rent and book an under construction apartment, you will have to pay both the rent on the house you stay and also the Pre-Emi on the home loan. You can escape paying the Pre-Emi, by opting for these loan schemes, as the builder recompenses you the Pre-Emi.

What are the disadvantages of these loan schemes?

  • The cost of your apartment is higher in these loan schemes, as the builder has added the interest costs he/builder has to pay to the bank on your behalf, to the overall cost.
  • The bank disburses the home loan amounts for your apartment. You/buyer will pay the EMI’s and the builder will pay you/buyer back, the interest component of the EMI. What if the builder does not keep his promise?
  • The builder might keep an exit clause preventing you from selling, until you get possession of the apartment. You cannot exit the project.

You need to beware of
You must buy an under construction apartment under these loan schemes, only from a builder with a good reputation and track record. This builder would most likely complete the construction of your apartment on time and you benefit from a rise in the prices over time on your apartment.