Saturday, May 25, 2013

What Is 20:80 Scheme In Under Construction Projects?

Every citizen in India is concerned with the rising Real Estate prices. 

Buying a home is just becoming a dream for a middle class income 

family. Property rates are shooting up every quarter in this lay off 

period. As a property buyer we not only pay for the property we 

planning to own but we also pay for the locality, the facilities around 

our vicinity, announced projects coming up near us and many more 

factors add up to our property price. Developers are trying their best 

to pull out cash from potential customers. Introduction of various 

property marketing schemes over the years has made many customers 

pay manifolds than they actually should have. Lets get introduced to a 

popular scheme that can make you count every single penny you own.  

Mid-sized developers are betting their last buck on the 20:80 scheme 

to beat the slowdown in the real estate business. The scheme, also 

known as the ‘subvention scheme’, is emerging as a popular marketing 

tool, as the buyer has to pay only 20 per cent upfront, while the 

remaining 80 per cent is paid at the time of possession. 

Interest subvention schemes are a modified form of financing home 

loans and have been part of residential real estate over the last few 

years. Under this scheme, a buyer of an ‘under construction’ piece of 

property is not required to pay monthly EMIs for a defined time-

frame, or until he takes possession. The slowdown in sales has 

prompted developers to offer investor friendly 20:80 schemes 

(subvention). Such schemes help the developer to prop up sales 

without reducing the prices.

Subvention or 20:80 scheme is an innovative financial structuring 

which involves purchasing of under-construction property directly 

from the developer with financing from a bank/institution. Under this 

scheme, the property buyer has to pay only 20% of the cost of the 

property upfront and the balance payments are to be made in 

installments only after possession.

The subvention scheme is a variation of the normal home loan scheme, 

whereby, up to possession of the property, the EMI for the loan is 

paid by the developer instead of the buyer. For cash-strapped 

developers, the 20 per cent upfront payment gives them adequate 

liquidity. And there is pressure to execute the project quickly. The 

remaining 80 per cent is funded by the bank, which creates a 

bipartite escrow account that keeps disbursing the funds as the 

project progresses. Such schemes are popular in the Rs 25-65 lakh 


This is how a typical 20:80 scheme works:

• The developer approaches banks/financial institution with the 

project which he wants to offer under the 20:80 scheme and gets the 

same approved.

• The developer then bundles this scheme with the property and 

offers it to potential buyers.

• The buyer purchases the property by paying just 20% of the total cost.

• The buyer gets home loan approved for the balance 80% from the bank.

• A tripartite agreement is made between the buyer, developer and 

the bank.

• The bank disburses the home loan amount to the developer at 

agreed intervals on behalf of the buyer.

• The developer pays the EMI on home loan to the bank, instead of 

the buyer, till possession.

• After the possession, the buyer starts paying EMIs to the bank.

But is it all good when its a real estate deal ?????..... Lets understand. 

This scheme involves the builder factoring in the cost of pre-emi into 

their launch price. Say, a builder plans to launch a project at 10,000 

p.sqft. They would launch the same at 11,000 p.sqft , with 

discounts(ranging from 500 psft to 1000 psft) offered to clients who 

don’t go ahead with the 20:80 scheme. This higher launch rate is 

basically factoring in the pre-emi that the builder will pay monthly to 

the bank on behalf of the customer. The bank basically charges a 

higher rate of interest, say 1.5% higher than the base rate for the 

scheme towards the customers. Builder can tie up with the bank for a 

period of 12, 24 or 36 months, depending on the time of possession. 

The customer has to pay the balance within the term period or 

possession, whichever is earlier (Most builders reveal this fact at a 

later stage), likewise the Builder will not get any other payment from 

the bank until the expiry of the term period or possession whichever 

is earlier.

In the scenario of delay in possession by the builder, there are 

basically two options:

1. The customer has the responsibility of paying the pre-emi to the 

bank until possession, if the term period stated by the builder 

expires & he has not given possession.

2. The builder makes the customer compulsorily sign an ADF option 

with the bank if he/she wants to opt for 80/20, thus enabling the 

builder to get the entire 100% irrespective of the possession of the 


One of the objectives of this scheme was to facilitate people staying 

in rented houses to buy under-construction property by taking a home 

loan. They could move into their own houses once they were ready and 

start paying EMIs instead of rent.

However, they have become more popular with property investors 

who would like to take leveraged positions on the property and sale 

the same on getting the possession.

Such schemes have worked well for the investors in the past since 

the property prices have been on the uptrend. However, if the 

property prices do not appreciate or start falling, the buyer will 

either have to exit at loss or hold on to the property and start paying 

the EMIs. Hence one should be cautious and invest in such a scheme 

only if one is in position to pay EMI post possession, just in case the 

market conditions are not conducive for exit.

Nowadays, most developers are using the 20:80 scheme in 

combination with the ADF (Advance Disbursement Facility). In case of 

normal home loan, disbursement is made by the bank to the developer 

in installments linked to construction. In case of ADF, a large part of 

the loan, say 80% to 90%, is disbursed in advance, ahead of 

construction. However, banks are very cautious in extending this 

facility to developers because of the potential for diversion of funds 

and usually only reputed developers with good track record are able 

to get this facility.

Another point to be noted is that under the ADF, since the large part 

of the loan is disbursed upfront, the interest cost during the 

construction will be higher. Under normal circumstances, this should 

not impact the buyer since the developer is paying the EMI till 


While on the face of it 20:80 scheme looks very attractive, one has to 

scrutinise the terms in detail and study the fine print to see if there 

are any hidden costs involved.

The main USP of the 20:80 scheme is that you don’t have to pay any 

EMI (interest cost) till possession. One needs to see if the developer 

is bearing this cost in full or passing it on to the buyer by increasing 

the price of the property. Taking the example referred to earlier if 

the property rate in Malad West is 10,000 psf and the developer is 

selling at the same rate under the 20:80 scheme, then it would be 

beneficial to the buyer. But if is selling at a higher rate say 12,000 

psf then he is passing on the interest cost to the buyer. Also if the 

developer is availing ADF, his interest cost would be higher in which 

case he should be willing to bear the same.

One of the biggest advantages of the 20:80 scheme is that it puts 

pressure on developer to complete the project on time since they 

have to pay EMI till possession. Any delay in completion would result in 

increased cost for them. Hence this reduces the execution risk to a 

large extent.

However some developers offer 20:80 schemes under which they 

agree to pay EMI only for a specified period of time say two years 

from the date of purchase instead of from the date of possession. In 

this case, the EMIs would start immediately after two years 

irrespective of whether the construction is completed or not.

Considering all this, it would be advisable to go for 20:80 scheme 

wherein the property is being offered at close to prevailing market 

price and the buyer has to start paying EMIs only after possession.

To conclude, a fair and transparent 20:80 scheme is favourable for all 

the players involved the property buyer, the property seller 

(developer) and the property financier (Banks/Institutions).

The property buyer is able to buy the property with limited cash 

outflow, the developer is able to increase his sales and the bank is 

able to lend more money thereby increasing its assets and 


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