Which is best for an under-construction property, construction linked plan, or subvention scheme?

Fundamentals of home buying | Jul 11, 2020 | 10 min read

Watching your home take shape, brick by brick, is an immensely satisfying aspect of buying a new home. When you invest in an under-construction property you not only get to experience that satisfaction, but also get a number of other benefits that you won’t get with ready-to-move-in flats. For one, the prices of an under-construction project are appreciably lesser than that of a ready property. Consequently, you enjoy a better appreciation on your property by the time it is ready to move in. But perhaps the biggest advantage of investing in an under-construction property is the flexibility in payments.

Additionally, you also pay a lower initial down payment. And even that can be eased with down payment assistance. HomeCapital pays up to 50% of your home’s down payment which can then be repaid free of interest. HomeCapital is India’s first and the only home down payment assistance program that helps you realize your dream of owning your first home. Once your down payment is sorted, you have two payment options for your under-construction property;

  • Construction-Linked Plan
  • Subvention Scheme

Let us try to understand both these options in detail to find out which one suits your needs the best.

Construction-Linked Plan for an Under-Construction Property

A Construction-linked Plan (CLP) is a three-party agreement done between your bank, the developer, and yourself for an under-construction property. Under CLP, you pay the developer the pre-determined down payment, while the rest of the loan is disbursed by your bank to the builder. But the disbursement is linked to the progress of construction. For each section of the project completed or a new slab laid, the bank disburses the pre-decided amount to the builder.

Advantages of Construction-Linked Plan

  • The builder prioritizes the completion of the project within time to give you possession at the earliest.
  • You only have to repay the pre-EMI interest during the projected construction period.
  • Your home loan EMIs rise gradually in amount as the construction of your home progresses.
  • This gives you time to better prepare yourself and plan your finances for the timely repayment of your home loan.
  • Your full EMIs start once you get possession of the property

Limitations of Construction-Linked Plan

  • You have to bear the potential risk of the project not being completed on time and might have to make a financial provision for the eventuality.
  • You will be doubly burdened, with EMIs as well as home rent, if the builder delays the completion beyond the stipulated construction period.

Subvention Scheme for an Under-Construction Property

A Subvention Scheme is also a tripartite agreement between your bank, the developer, and yourself for an under-construction property. You make the initial down payment and the rest is disbursed by the bank to the builder. In the early version of the subvention scheme, the bank disbursed the entire loan amount to the builder up front. But it has now been upgraded to construction-linked disbursement for better consumer protection.

Advantages of Subvention Scheme

  • Here, the developer pays the pre-EMI to the bank during construction, until you get the possession.
  • Your full EMIs start only after you get the possession of your home.
  • It acts as a great motivator for the builder to finish the construction of your property on time.
  • This ensures that you are not doubly burdened with EMIs as well as any rent you might have to pay.

Limitations of Subvention Scheme

  • A home loan availed under subvention will be in your name, so if a builder defaults on the pre-EMI, it will adversely affect your credit or CIBIL score.
  • You must ensure that your under-construction property agreement states that the developer will pay the pre-EMIs until possession, and not for the projected construction period.

So, which one should you choose?

Now that you know that you have a couple of options for buying an under-construction property, the ultimate choice between the two boils down to you. Where a construction-linked plan safeguards your credit score, subvention scheme protects you better against unforeseen delays. But both of them ensure that the builder is accountable, and you get the possession of your home at the earliest.

If you do not have a pressing urgency, an under-construction property makes for the perfect home buying option that appreciates better over time.

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