By Atul Monga
Affordable housing in India refers to housing units that are priced reasonably, and are therefore affordable to middle and low-income groups. India has a significant shortage of affordable housing, and the government has been taking steps to address this issue. In 2015, the Indian government launched the Pradhan Mantri Awas Yojana (PMAY) scheme, which aimed to provide affordable housing to all by 2022. Under this scheme, the government provides financial assistance to eligible individuals in the form of interest subsidies and loans to construct or purchase a house. ₹79,000 crores were allocated to the PMAY scheme in Budget 2023.
Apart from the PMAY scheme, several private developers are also constructing affordable housing projects in the country. These projects are typically located on the outskirts of cities, where land is cheaper. Despite the efforts made by the government and private developers, the demand for affordable housing in India continues to exceed the supply.
According to RBI, housing loans to individuals of up to ₹50 lakh for houses worth up to ₹65 lakh in the six metropolitan cities, or housing loans up to ₹40 lakh for houses priced up to ₹50 lakh in other centers, fall under the affordable housing loan category. Here, it is important to understand that affordable home buyers would mostly be first-time home buyers for whom a home is a major investment. So, when it comes to home loans, they would expect the lender to provide them with certain features and benefits that make it easier for them not only to get a loan but also to service the EMIs.
Here are four expectations of affordable home buyers from lenders.
Higher loan-to-value ratio: Loan-to-value ratio (LTV) refers to the proportion of the property you can finance through a loan. It is also expressed in percentage terms. Let us take an example. If you are buying a property of ₹50 lakh and the lender is offering you an LTV ratio of 70%, then you are eligible for a loan of ₹35 lakh. The remaining ₹15 lakh are the down payment that you need to pay from your own pocket.
Affordable home buyers would benefit from a higher LTV, as it would mean they would have to pay a lower amount as a down payment. Many banks offer an LTV of 80% for loans up to ₹30 lakh, while some banks offer a higher LTV of 90% for loans of a similar amount. Lenders could make home loans more attractive to affordable home buyers by offering a lower LTV.
Flexible payment options: A home loan is a long-term commitment and the EMIs need to be paid for a period of 15 years or more. Affordable home lenders would expect flexible EMI options that let them pay their EMIs with the least burden on their finances. Now home loans offer borrowers to opt for increasing or decreasing EMI. In the first option, you pay a lower EMI during the initial years and a higher EMI as your EMI increases. For the second option, the loan is structured in such a way that the EMIs are higher in the initial years and then subsequently decrease in the later years. Affordable home buyers would benefit from flexible payment options that let them adjust their EMI based on their increasing or decreasing income so that it is easier to pay the EMIs.
Early repayment facility: While there is no prepayment penalty for floating-rate home loans, there are several conditions. For example, borrowers have the option to pay up to 25% of the opening principal every financial year after a period of 6 months. Any prepayment over this threshold will attract a 2% penalty for up to a certain period. Also, the prepayment done through refinance from any bank/HFC/NBFC or financial institution attracts a prepayment penalty. Lenders should offer early repayment solutions to borrowers without any clauses so that they can pay off their home loan earlier if possible and thus save on interest.
Lower processing charges: Banks charge a processing fee to cover administrative costs that it has to bear when processing the home loan. Some banks charge a flat processing fee while for others it ranges between 0.3% and 2.5% of the loan amount with a maximum cap. Processing fees would normally vary between ₹2,500 and ₹6,000. Higher digitization of operations and the use of technology can bring down the processing fee even further.
If these expectations are met, home loans will become more attractive to affordable home buyers and that will give a much-needed boost to the affordable housing segment.
(The author is Co-Founder & CEO, BASIC Home Loan)