After the steep rise in home loan rates over the past two years, borrowers for low-cost housing have some reason to cheer from a recent Cabinet decision. From now, if you have taken a housing loan of up to R15 lakh, you will get a 1% subvention in the interest rate, provided the cost of the house doesn?t exceed R25 lakh.
The National Housing Bank will act as a nodal agency for implementing the scheme for both scheduled commercial banks and housing finance companies. To implement the scheme, the Centre has made a budgetary provision of R500 crore for FY 2011-12. Earlier, in September 2009 , the government had given an interest subvention on loans of up to R10 lakh where the cost of the house was below R20 lakh. The scheme provided interest subsidy on housing loans to generate additional demand for credit and to improve affordability of housing to borrowers in the lower and middle income groups. The scheme was in operation from October 1, 2009, to September 30, 2010, and the government had allocated R300 crore in the Budget of 2009-10 for the scheme.
So, with raising the eligibility limit of the housing loan for the 1% interest rate subvention, the limit of subsidy for an individual borrower would increase to R14,865 for a loan of R15 lakh on reducing balance basis from the present limit of R9,910 for a loan of R10 lakh. Analysts say the Cabinet’s decision to provide interest subsidy on housing loans will generate additional demand for credit and will improve affordability of housing loans to borrowers in the lower and middle income groups. As the demand for housing continues to rise because of urbanisation, demographic changes and falling household size, Goldman Sachs estimates that an additional 140 million people will move to cities by 2020 and average household size is likely to continue to decline, which will push up demand for housing. Also, falling raw material prices and shortage of land will make people to move to small-size apartments.
In fact, for low-cost housing, the current Reserve Bank of India norms says that banks can give up to 90% of the value of the property for loans up to R20 lakh. However, for loans above R20 lakh, the loan-to-value ratio (LTV) will not exceed 80%. This ceiling on the LTV was put by the central bank to prevent excessive leveraging by banks. Earlier, RBI had also raised concerns on teaser loans offered by various banks where they kept comparatively lower rates of interest in the first few years, after which rates were reset at a higher rate. The RBI also increased the standard asset provisioning on the outstanding amount from 0.40% to 2% because of the higher risk associated with teaser loans. The central bank had clarified that the provisioning on these assets would revert to 0.40% after one year from the date on which the rates are reset at higher rates.
Though banks have discontinued teaser loans, some banks like Axis Bank are offering fixed interest lifetime loan. Brijesh Damodaran, founder and managing partner of Zeus WealthWays LLP, says the lifelong fixed rate interest would be most suitable for a shorter duration as the economy goes through the highs and the lows over a period of time. In a floating rate scenario, he says the EMI changes as per the prevailing rates. For calculating the interest subsidy, each loan disbursement will have to be treated as a separate loan and for each disbursement, the subsidy claim can be made for 12 instalments. If the borrower takes the full disbursement at once, the subsidy will be provided upfront on the entire amount of the loan disbursed by the bank and the bank will calculate the subsidy for 12 months period from the date of disbursement of the loan following the reducing balance of equated monthly instalment.
Analysts say the subsidy of 1% will be defined as reduction in interest rate by 100 basis points per annum from the existing rate of interest for a particular amount and tenor. It will be applicable to the first 12 instalments of all such loans sanctioned and disbursed during the continuation of the scheme and will be computed for 12 months on the disbursed amount. The subsidy amount will be adjusted upfront in the principal outstanding, irrespective of whether the loan is on fixed or floating rate basis. The number of beneficiaries to be covered will depend on the size of the loan amount and the number of people approaching the nodal agency for interest subvention.