The Big Story about actual savings under Prime Minister Awas Yojana: What is the catch?

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February 18, 2017 1:49 PM

In a bid to boost low-cost housing, the Prime Minister had on New Year’s eve announced two new interest subsidy rates of 4% and 3% for loan amounts of up to Rs 9 lakh and Rs 12 lakh, respectively, under the Prime Minister Awas Yojana.

There was no clarity about the beneficiaries of Prime Minister Awas Yojana. (Website)There was no clarity about the beneficiaries of Prime Minister Awas Yojana. (Website)

In a bid to boost low-cost housing, the Prime Minister had on New Year’s eve announced two new interest subsidy rates of 4% and 3% for loan amounts of up to Rs 9 lakh and Rs 12 lakh, respectively, under the Prime Minister Awas Yojana (PMAY). However, there was no clarity about the beneficiaries of the scheme. Post the Budget, the government has clarified that the beneficiaries under the new slabs would be those with household incomes of Rs 12 lakh and Rs 18 lakh, respectively.

But there is still some confusion among homebuyers and industry experts alike on the actual quantum of savings under the new interest subvention scheme. Government sources as well as some media reports are saying that a person buying his first home on a 20-year loan will now be able to save around Rs 2.40 lakh, while we had yesterday (on February 17) reported that your first home on a 20-year loan will cost up to Rs 5.28-lakh less. So, who is correct and what is the real secret which nobody is revealing? But let us first take a cursory look at this scheme.

Earlier people earning below Rs 6,00,000 a year were entitled to receive a subsidy of 6.5% on a principal loan of Rs 6 lakh. But now homebuyers in the income brackets of up to Rs 12 lakh and Rs 18 lakh will also be eligible for 4% and 3% interest rate subsidy, respectively, on their home loans. Subsidy is given regardless of the total loan amount, but will be limited to the home loan amount of up to Rs 9 lakh and Rs 12 lakh, respectively, for the above two categories.

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We had yesterday reported that if you earn up to Rs 18 lakh per annum, buying your first house will cost about Rs 5.28 lakh less if you go for a 20-year home loan, as you will be able to save about Rs 2200 per month in EMI. And if you earn up to Rs 12 lakh per annum, then you will be able to save about Rs 5.17 lakh on your total home loan outgo, assuming an interest rate of 9%. This is in sharp contrast to some claims still being made that homebuyers will save only up to Rs 2.44 lakh over a period of 20 years.

So what is the real catch?
The secret is that the amount of Rs 2.44 lakh is not the actual saving amount. That is the subsidy amount which the government will giving to the lender upfront whenever you go to buy your first house. Let us try to understand this with the following example:

Suppose you plan to take a home loan of Rs 12 lakh for buying your first house. Now the government will give a subsidy of around Rs 2.44 lakh to the lender. This will reduce your loan amount to Rs 9.56 lakh. Now your EMI will be calculated on this amount and you will save around Rs 2196 per month in EMI, on 9% interest.

Here is how it works:

Loan Amount: Rs 12 lakh
Interest: 9%
Loan Tenure: 20 years
EMI: Rs 10,797
Total Interest Paid: Rs 13,91,211
Total of Payments (Principal + Interest): Rs 25,91,211

Now after a subsidy of around Rs 2.44 lakh, your effective loan amount will be Rs 9.56 lakh

So, Loan Amount: Rs 9.56 lakh
Interest: 9%
Loan Tenure: 20 years
EMI: Rs 8,601
Total Interest Paid: Rs 11,08,331
Total of Payments (Principal + Interest): Rs 20,64,331

Therefore, Saving in EMI: Rs 2,196
Saving in Interest: 282,880
Saving in Total of Payments (Principal + Interest): Rs 526,880

So, even if the payment of Rs 2.44 lakh is made by the government at one go and not month by month, your total saving will be around Rs 5.27 lakh over a 20-year loan tenure and not only Rs 2.44 lakh as is being reported. (On different interest rates and loan tenures, however, there can be variations in the actual savings.)

We, however, would like to make it clear here that the fine prints of this scheme are still not out and if the government is still hiding something, then we are not responsible for that.

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