Growth of home loan sector for affordable housing

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    Announced towards the end of 2016 by the Prime Minister Narendra Modi, the Pradhan Mantri Awas Yojana (PMAY) is an initiative taken to achieve the dream of ‘housing for all’ by 2022. The objective of this initiative is to facilitate affordable housing for all.

   Though it appears to be a distant dream and a difficult task, the government has already started working on this initiative by partnering up with many of the leading builders/developers and financing institutions such as banks and non-banking financial companies (NBFCs). The government has proposed many plans across the nation to provide affordable housing to the middle as well as lower-middle class households. The affordable homes are considered to be for 300 sq ft in any of the four metro cities or 600 sq ft in any non-metro areas.

Factors contributing to the growth of home loan sector

   There are many factors that have contributed to the growth of home loan sector and reality in India compared to the past few years. Some of them are notable since they have been introduced recently and have a significant impact on the realty market. The realty sector in India has not been witnessing any growth for few many years and rather been dull, however, the introduction of PMAY that has facilitated affordable housing has contributed largely to the increasing number of home loans being sanctioned by various financial institutions. HDFC Bank has already reported a significant growth in sale figure for the home loan in the first quarter. The bank has sanctioned over thousands of home loan applications since the beginning of this year. Considering various changes to the Indian economy after demonetization, it is essential to understand the factors that are taking home loan sales to a higher level.The following are few of the factors that have contributed to theincrease in demand for home loans:

Credit Linked Subsidy Scheme (CLSS) for Middle Income Group (MIG)

   Under the Pradhan Mantri Awas Yojana scheme, a borrower can take advantage of the home loan interest subsidy to save over Rs.1,000/2,000 on EMIs. This scheme entitles the borrowers who are in the middle-income group (buying a house for the first time) to be eligible for an interest subsidy which is based on the loan amount and the annual income of the borrower. The lender collects the subsidy amount from the government. The subsidy amount is paid by the government and not the builder/developer which allows the lender to claim for a refund.

The following subsidy scheme is applicable:

  • Individuals who are taking a home loan up to Rs.9 lakh and earning up to Rs.12 lakh per year are eligible for a 4% subsidy.

 

  • Individuals who are taking a home loan up to Rs.12 lakh and earning up to Rs.18 lakh per year are eligible for a 3% subsidy.

Increasing demand for affordable housing

   Following the popularity of home loan interest subsidy, developers and builders have started realizing demand and supply ratios for affordable home loans which are turning out to be profitable. Instead of creating luxurious living spaces that might take a longer period of time to sell, building affordable homes are more profitable since the majority of borrowers are from the middle-income group who are looking for affordable homes. Moreover, affordable homes can be built faster and more in numbers for comparatively lesser space than most other projects.

Reaction from financing institutions

   Most banks and NBFCs are positive regarding the subsidy and agree to the fact that affordable houses are indeed contributing to the increasing number of home loan applications. Many financing institutions are also predicting the home loans segment to grow at 25% subject to availability of subsidy. Moreover, the financing institutions are not losing any money in the subsidy scheme since its funded by the PMAY scheme. The government has also asked the financing institutions to promote the availability of CLSS for MID through different mass media channels.

Renting a house v/s buying it

   Considering the increase in rental yields in the past few years, individuals are now finding the purchase of an affordable house to be more convenient than paying a high rental amount for a house. Depending on the amenities, locality, and other factors, the cost of an EMI for a home loan might turn out to be cheaper than paying the rent for a house every month.

   Additionally, the Budget 2017 has set a maximum limit of Rs.2 lakh for tax deductions on a rented house. Depending on the inclination of buying a house based on income and other factors, an individual can easily buy an affordable home. Most financial institution lists approved housing projects in various parts of India and also provide an option to have a co-signer which makes it even more easy to apply for a home loan.

Tax benefits on affordable homes

   The borrower is eligible for tax benefits under the Section 80EE of the Income Tax Act, 1961. The borrower can claim for income tax deductions up to a maximum of Rs.1 lakh for a financial year. Moreover, the borrower can also claim the tax deduction on principal repayment under Section 80C for interest on home loan. The builder/developer’s profit is exempted from tax for the next five years starting 2016 who enroll for this scheme to build affordable homes.

By  Vanshika Kumari

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