In order to drive demand for real estate, the government has extended the benefits of credit-linked subsidy scheme (CLSS) under the PMAY (Pradhan Mantri Awas Yojana) programme to the middle income group (MIG) earning up to `18 lakh a year. Those in the MIG with an annual income above `6 lakh and up to `12 lakh will get an interest subsidy of 4% for loan up to `9 lakh and those with an annual income above `12 lakh and up to `18 lakh will get an interest subsidy of 3% on loan up to `12 lakh.
The government has also increased the tenure of the loan for low income group (LIG) and economically weaker section (EWS) from 15 to 20 years. The updated guidelines now include dwelling units with a carpet area of 110 square metre, which accounts for a lion’s share in overall residential supply.
Benefits to MIGs
The CLSS was launched by Prime Minister Narendra Modi in June 2015 to provide ‘Housing for All by 2020’. It was initially offered to economically weaker sections (EWS) and lower income groups (LIG) and was extended to MIG in January this year. The scheme can be availed by first-time home buyers who have not used any other assistance under housing schemes and have applied for a housing loan after January 1, 2017.
The total interest subsidy to be paid under MIG group for loan up to `9 lakh is `2.44 lakh and on a loan of `12 lakh, it comes to `2.48 lakh per beneficiary. The total interest subsidy on the loan amount will be paid to the beneficiaries upfront by the bank, which will reduce the borrower’s burden. The maximum tenure of loan will be 20 years.
The interest subsidy of 4% under CLSS for MIG on loan of `9 lakh will bring down EMIs of the borrower by `2,062 per month on a housing loan of `9 lakh and interest subsidy of 3% on a loan of `12 lakh will lower the EMI by `2,019; factoring current housing loan interest rate as 8.65%.
Impact on real estate
The extension of CLSS to MIG would bring more beneficiaries within the ambit of the scheme and would provide demand impetus in an otherwise sluggish market. Real estate sales have been weak as a report by Knight Frank says that there has been 25-30% drop in new home sales in the top eight cities. The slowdown is also reflected in a drop in bank credit for housing from 18% pre-demonetisation to 13% now.
A report by Nomura Research says the CLSS to middle income groups will make 30-50% of large housing finance companies’ (HFCs) books eligible for this scheme. The subsidy is equivalent to 10% of principal of the loan for larger HFCs and 20% of the principal for smaller HFCs.
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Similarly, a report by Crisil says that a significant portion of households in large cities, including Mumbai Metropolitan Region, National Capital Region and Bengaluru, fall in the income bracket of `6-18 lakh a year. “End-users might start revisiting their purchase decisions. Though interest rates have softened over the past few quarters, the overall ticket size of residential units across many large cities is still beyond the affordability of middle-income households,” the report underlines.
Going ahead, real estate developers too, will start focusing on projects with smaller size. Also, with interest rates falling and a supportive CLSS framework, affordability for housing will improve for end-users.