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Tata Capital > Blog > Loan for Home > 80:20 Home loan rule you should know before buying a house

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80:20 Home loan rule you should know before buying a house

80:20 Home loan rule you should know before buying a house

Imagine this scenario: You’ve set your sights on the perfect home, the place where you can build a lifetime of memories. However, there’s a catch – the cost of the property can be overwhelming. That’s where the 80:20 home loan rule steps in, offering a financial lifeline for aspiring homeowners.

This innovative financing approach allows you to secure an under-construction house by paying just 20% of the property’s cost, with the rest financed by a bank. But, here’s the twist: the builder takes on the responsibility of paying the loan’s interest until possession. It’s a tempting offer, but is it too good to be true?

Let’s navigate the world of mortgage regulations and government home loan schemes with a friendly and helpful guide, where we explore the home loan 80:20 meaning and its ins and outs.

Understanding 80:20 home loan rules

Imagine buying a property worth Rs. 1 crore for just Rs. 20 lakh and obtaining a bank loan for the remaining Rs. 80 lakh. The builder shoulders the responsibility of paying the interest on this bank loan until you become the property’s rightful owner. 

The 80:20 home loan rule is a unique financial arrangement designed to make owning your dream home more accessible. With this scheme, you can purchase an under-construction property by paying only 20% of the property’s cost upfront. The remaining 80% is financed through a bank loan.

Also, read – Rule of 72 & More: Personal Finance Guide

How does the 80:20 home loan rule work?

Now that you’ve understood the home loan 80:20 meaning, it’s time to understand how the rule works. 

The 80:20 home loan rule, also known as the subvention scheme, allows buyers to pay only 20% of the property cost upfront, while the bank disburses the remaining 80% to the builder during construction. Throughout this period, the builder pays the interest on the disbursed loan amount, reducing the buyer’s immediate Equated Monthly Installments (EMI) burden. The buyer starts paying EMIs only after possession or once the subvention period ends. This 80:20 loan structure helps ease short-term cash flow but requires careful evaluation of builder credibility and agreement terms.

Also, read – RBI Home Loan Guidelines: Latest Updates and Key Insights

Benefits of 80:20 home loan schemes

The 80:20 schemes, when implemented properly and transparently, can offer an array of benefits to both homebuyers and builders. 

Let’s explore these advantages in detail:

Reduced initial financial burden: One of the most enticing aspects of the 80:20 scheme is that it significantly reduces the initial financial burden on the buyer. With just 20% of the property’s cost to pay upfront, you can secure your dream home without depleting your savings.

Interest coverage: In a typical home loans, the buyer is responsible for interest payments. However, in the 80:20 scheme, the builder covers the interest cost on the bank loan until the possession of the property. This arrangement allows you to escape the dual financial strain of paying rent and EMI simultaneously.

Low entry cost: With these schemes, you can book a property with a minimal upfront payment, usually from 5% to 20% of the total cost. This low entry cost makes homeownership accessible to a broader audience.

Potential for property appreciation: As the builder bears the interest cost and you benefit from the increased property prices once construction is completed, you may see potential gains in terms of property appreciation.

Builder’s financial benefits: Builders also stand to gain from these schemes, as they can secure finances for their projects at a lower interest rate through buyers.

Also, read – Things to Keep in Mind before Prepaying your Home Loan

Comparison: 80:20 vs other home loan ratios

If you compare home loan ratios, for instance, 75:25 or 90:10 against the 80:20 home loan, here’s how they differ:

Parameter80:20 Home loan schemeOther home loan ratios
Upfront paymentBuyer pays only 20% initiallyBuyer pays a higher upfront amount
EMI during constructionBuilder pays interestBuyer pays pre-EMIs
Cash flow impactLower short-term burdenHigher immediate outflow
Loan disbursement80% disbursed to the builder earlyDisbursed as per the construction stages
Risk exposureHigher if the project is delayedLower due to stage-wise funding
SuitabilityIndividuals looking for short-term cash reliefBuyers who prefer safer structures

Tax benefits under the 80:20 home loan rule

The 80:20 home loan tax benefits are similar to regular home loans. However, they can be claimed only after the property’s possession. During the construction period, even though the builder pays the interest, the buyer cannot claim tax deductions. Once possession is obtained, the buyer can claim a tax deduction on an 80:20 loan on interest paid under Section 24(b) for up to Rs. 2 lakh per year. You can also claim a deduction on principal repayment under Section 80C, subject to conditions. Any pre-construction interest can be claimed in five equal installments after possession, as per income tax rules.

Also, read – Can You Get a 90% Home Loan?

When to consider an 80:20 home loan scheme?

The decision to opt for an 80:20 scheme should align with your specific circumstances and preferences. Here’s when you might consider this financing approach:

Dual financial commitments: If you find it challenging to manage both rent and EMI payments simultaneously, an 80:20 scheme could provide relief. The builder’s responsibility for the loan’s interest can ease your financial burden.

Confidence in builder reliability: Before entering into such a scheme, it’s essential to have confidence in the builder’s ability to deliver the project on time. Extensive due diligence, including a thorough background check of the builder’s track record, financial stability, and reputation, is crucial.

Benefits of property appreciation: You may consider the 80:20 scheme if you believe that the property’s value will appreciate significantly by the time construction is completed. This potential appreciation can offset any minor increases in property costs due to the scheme.

Balancing entry costs: If you have limited savings and wish to minimize the initial financial outlay while securing your dream home, the 80:20 scheme offers a low entry cost.

However, it is essential to exercise caution and carefully read the fine print before committing to such mortgage regulations. Every homebuyer’s situation is unique, and making the right decision involves a thorough evaluation of your financial capabilities, builder trustworthiness, and long-term homeownership goals.

Also, read – Plot Purchase Loan: Eligibility, Interest Rates & Guidelines

Drawbacks of 80:20 schemes

While the 80:20 home loan rule offers enticing benefits, it’s essential to weigh these against the potential drawbacks and risks associated with the scheme. 

Here are some key drawbacks to keep in mind:

Higher property costs: One of the primary concerns is that the price of the property may be higher under an 80:20 scheme. Builders often factor in the interest cost when setting the property price, which can lead to a slightly inflated figure compared to conventional purchase options.

Project delays: If the construction project experiences delays, you could end up paying more in terms of interest. This can significantly increase the overall cost of the property, eroding some of the financial benefits you initially enjoyed.

Risk of builder non-compliance: There’s always a risk that the builder may not fulfill their promise of paying the interest on your bank loan for the agreed-upon period. If this happens, you could find yourself responsible for both rent and EMI payments, leading to financial strain.

Lack of flexibility: In some cases, builders may include clauses that prohibit buyers from selling the property before possession. This lack of flexibility could limit your options if your circumstances change.

Conclusion

In conclusion, understanding the 80:20 home loan rule is vital for anyone looking to purchase a house. This principle emphasizes the importance of financial prudence and responsible borrowing. By aiming to cover at least 20% of the property’s cost, you not only improve your chances of securing a favorable loan but also lower the risk associated with high debt.

With careful financial planning, this rule can be a valuable tool to make homeownership more accessible and sustainable, helping you build a secure and stable future in the home of your dreams. The key to a successful homeownership journey is diligent research, understanding your unique financial situation, and thorough scrutiny of the builder’s reliability. Make an informed choice, and you’ll be on the path to securing your dream home with confidence. For personalized financial solutions and expert guidance, consider Tata Capital. Your journey to homeownership begins with wise decisions.

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FAQs

How does the 80:20 scheme reduce initial financial burden?

The 80:20 home loan scheme reduces the buyer’s upfront burden by requiring a payment of only 20% of the property value initially. The builder covers the remaining 80% linked to the home loan during construction, easing EMI pressure until possession or loan conversion.

Who pays the interest during construction under the 80:20 home loan?

 

Under the 80:20 home loan scheme, the builder pays the interest on the disbursed loan amount during the construction period. The buyer’s EMI obligation usually starts only after possession or once the interest subvention period ends, as per the agreement terms.

Are there any risks associated with the 80:20 home loan scheme?

 

Yes, the risks associated with the 80:20 rule include project delays, builder defaults on interest payments, or disputes after the subvention period ends. If the builder fails to pay interest, the liability may shift to the buyer. Besides, such schemes often involve higher property prices.

Can I pre-close my loan under the 80:20 scheme?

 

Yes, pre-closure is generally allowed under the 80:20 scheme, but it depends on lender and builder agreements. Buyers should check for lock-in periods, foreclosure charges, and conditions related to the subvention benefit before opting for early loan closure.

How can I verify a builder’s credibility for an 80:20 scheme?

 

You can verify a builder’s credibility by checking the RERA registration, delivery records of previous projects, financial stability, and customer feedback. Moreover, you can confirm tie-ups with reputed banks, review legal approvals, and carefully examine the subvention agreement to understand obligations and risks.

What documents are required for applying under the 80:20 home loan?

 

The documents required to apply for the scheme include identity and address proof, income documents, bank statements, property allotment letter, subvention agreement, approved project documents, and RERA details. Lenders may also ask for sale agreement drafts and construction-linked payment schedules.

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