Covid-19 has fundamentally changed our perception of risk. Lives have been affected and so has livelihood. Today, a large set of customers are looking for the new regime of low interest rates for home loan.
Larger stable financial institutions and banks have seen record highs of home loan disbursements, mainly backed by flight of loan accounts from HFCs who cannot afford to lower rates further. It’s expected that the new normal of lower interest rates will continue for at least this financial year.
Home loan and its benefits
A set of bargain hunters are making their property purchase decisions. Incentivised by innovative schemes offered by developers (which basically boils down to larger discounts) and increased affordability backed by low interest rates.
However a home loan has a larger context and benefits. Let’s see them one by one.
Tax Benefits for home loan:
1. 80(c): The Principal portion of the EMI paid for the year is allowed as deduction under Section 80C. The maximum amount that can be claimed, is up to Rs 1.5 lakh. This is along with several other tax saving instruments like PF/PPF etc.
2. 24(b): Deduction of up to Rs 2 lakh for self-occupied property and entire interest on let out property.
3. 80EEA: It will benefit the middle-class first-time home buyers who will get an enhanced deduction of Rs 1.5 lakh (over and above the existing deduction of Rs 2 lakh) on account of interest on housing loan for a house valued up to Rs 45 lakh if the loan is taken before March 31, 2021. (Definition of affordable homes).
According to the Finance Bill, if the unit is located in a metropolitan city, its size should not exceed 645 sq ft or 60 sqm. For units in any other city, the size has been limited at 968 sqft or 90 sqm.
Definition of cities that are considered metropolitan for this purpose are Bengaluru, Chennai, Delhi, Faridabad, Ghaziabad, Greater Noida, Gurugram, Hyderabad, Kolkata, Mumbai and Noida.
B. PMAY: Pradhan Mantri Awas Yojana consists of four pillars which deals in various spheres of housing development. One of them being Credit Linked Subsidy Scheme or CLSS which directly subsidises home purchase through interest subsidy of home loans. Banks and financial institutions act as facilitators to have a fair equitable implementation.
|CLSS Scheme Type||EWS and LIG||MIG 1||MIG 2|
|Eligibility Household Income (Rs)||Up to Rs 6,00,000||Rs 6,00,001 to Rs 12,00,000||Rs 12,00,001 to Rs 18,00,000|
|Carpet Area-Max (sqm)||60 sqm||160 sqm||200 sqm|
|Interest Subsidy (%)||6.5%||4%||3%|
|Subsidy calculated on a max loan of||Rs 6,00,000||Rs 9,00,000||Rs 12,00,000|
|Loan Purpose||Purchase/self-construction/extension||Purchase/self- construction||Purchase/self-construction|
|Validity of scheme||31/03/2022||31/03/2021||31/03/2021|
|Max Subsidy (Rs.)||2.67 Lakh||2.35 Lakh||2.30 Lakh|
|Woman Ownership||Yes (only for purchase)||Not Mandatory||Not Mandatory|
|Loans to be approved on or after||June 2015||1-1-2017||1-1-2017|
|Net Present Value taken for subsidy calculation||9%||9%||9%|
|Aadhaar Requirement||Not Compulsory||Compulsory||Compulsory|
|Cap on loan amount||No, additional loan beyond the specified limits, if any, to be at a non-subsidized rate.||No, additional loan beyond the specified limits, if any to be at non-subsidised rate||No, additional loan beyond the specified limits, if any to be at non-subsidised rate|
|Cap on property Value||No cap on property value specified||No cap on property value specified||No cap on property value specified|
*Interest subsidy will be available for a maximum loan tenure of 20 years or the loan tenure whichever is lower.
Pradhan Mantri Awas Yojana eligibility
- The beneficiary family should not own a pucca house in his/her or in the name of any member of his/her family in any part of India.
- In the case of a married couple, either of the spouse or both together in joint ownership will be eligible for a single subsidy.
- The beneficiary family should not have availed of central assistance under any housing scheme from Government of India or any benefit under any scheme in PMAY.
Pradhan Mantri Awas Yojana beneficiary
The beneficiary family will comprise husband, wife and unmarried children. (An adult earning member irrespective of marital status can be treated as a separate household in MIG category)
Pradhan Mantri Awas Yojana coverage
All statutory towns as per Census 2011 and towns’ notified subsequently, including planning area as notified with respect to statutory town.
C. Advantage Women Ownership:
1. Many home loan institutions provide lower interest rates for women applicants. A lower rate makes a great impact on Equated Monthly Instalments (EMIs) and provides significant savings over the tenure of the loan.
2. Women benefit as co-borrowers: Women have the opportunity to apply as co-borrowers with their spouses. Combined income of the couple can mean a higher loan eligibility and more flexibility in choosing a suitable home for their family. Furthermore, individually both partners can enjoy a tax deduction on the home loan repayments with the maximum deduction allowed in principal as well as the interest at Rs 1.5 lakh and Rs 2 lakh respectively (80(c) and 24(b)).
D. CIBIL* Scores and Rate of Interest:
Around a year back, bank and financial institutions introduced risk-based pricing. Which translates into better offered rates for those who have higher credit scores. Most institutions in India consider CIBIL as their standard benchmark.
Although risk grades vary institution to institution
A score of 730-750+ is graded to be highest and offered the best rates.
650 to 675+ to 770 will be considered to be moderate risk grades, so are people who are new to CIBIL.
575-600+ up to 650 category is treated with caution.
A score below 575-600 and obtaining a loan becomes a little difficult or institutions may impose a premium on rates charged.
Disclaimer: (All financial institutions have their own unique parameters and rates charged are at sole discretion of the lending institution.)
*CIBIL is a credit bureau which gives credit rating to individuals through an information sharing initiative by banks and financial institutions, up to a scale of 900.
E. Atma Nirbhar Bharat Package 3.0
Govt of India as an initiative to boost housing demand and give relief to developers who need to sell their unsold inventories at a price less than circle rate, announced a new package which will be ratified in due course. However, quoting from Finance Minister Nirmala Sitharaman on Thursday, November 12, certain income tax relief measures were brought in for real-estate developers and home buyers.
“To enable the real-estate developers to liquidate their unsold inventory at a rate substantially lower than the circle rate and giving benefit to the home buyers, it has been decided to further increase the safe harbour from 10 per cent to 20 per cent under section 43CA of the Act for the period from November 12 to June 30 in respect of only primary sale of residential units of value up to Rs 2 crore. Consequential relief by increasing the safe harbour from 10 per cent to 20 per cent shall also be allowed to buyers of these residential units under section 56(2)(x) of the Act for the said period,” a Finance Ministry release said.
It said that for these transactions, circle rate shall be deemed as sale/purchase consideration only if the variation between the agreement value and the circle rate is more than 20 per cent.
The legislative amendments will be proposed in due course, the release said.
Previously, the circle rate was deemed to be the sale/purchase consideration for real estate developers and buyers only where the variation between the agreement value and the circle rate is more than 10 per cent.
F. How Fiscal Stimulus and Lowering of Rates have changed eligibility
A hypothetical example:
|Presumed Family Income||Rs 6,00,000||Rs 12,00,000||Rs 18,00,000|
|Approximate Eligibility **||Rs 29,00,000||Rs 26,00,000||Rs 52,00,000||Rs 47,00,000||Rs 77,00,000||Rs 69,00,000|
|EMI***||Rs 21,000||Rs 40,000||Rs 60,000|
|Approximate cost of unit which may be purchased||Rs 32,25,000||Rs 29,00,000||Rs 65,00,000||Rs 58,75,000||Rs 96,25,000||Rs 86,25,000|
|Presumed Tenure||20 years|
|*approximate market ROI which may differ widely|
|*presuming 40% of total monthly income as home loan EMI|
|*** Approximate EMI calculated with variance of +/-Rs 500|
|*** Approximate Eligibility has been converted to next whole number|
|**** For MIG 1 and MIG 2 80% funding of property has been considered|
|**** For EWS/LIG 90% funding of property considered|