1% loan subsidy to boost affordable housing in Tier II & III cities

Published: August 10, 2009

Govt has offered 1% subsidy on loans up to Rs 10 lakh & doled out tax sops for developers. But this will mainly boost affordable housing projects in Tier II & III cities. Metros will be missing from the list.

At a time when low cost is the clearly the buzzword in the real estate sector, Union finance minister Pranab Mukherjee’s move to offer 1% interest subsidy on housing loans up to Rs 10 lakh can be seen as a positive development for the middle income group. The condition being that the price of the house should not exceed Rs 20 lakh. So what does this really mean for buyers who want to own their dream house? Is it really as good as it looks?

Avinash Narvekar, partner, Real Estate Practice, E&Y says the latest incentives are targeted at benefiting buyers of affordable homes. But there are some pros and cons. “The interest subsidy scheme would only apply to houses in the sub Rs 20 lakh category. This would automatically rule out most properties in a city like Mumbai, except for properties in distant suburbs. Secondly, the interest subsidy is only for the first year. Housing loans are inherently long-term borrowings (of 5-20 years), and therefore the benefit of the scheme may not be significant,” he says.

So let’s take a look at what this can do for your EMI. According to Kaustuv Roy, executive director, India, Cushman & Wakefield (C&W), for a Rs 20-lakh apartment, the sanctioned loan amount is generally around Rs 15 lakh. So for a Rs 15-lakh housing loan, at 10% interest rate per annum and a 20-year tenure, the EMI comes to Rs 14,476 per month. Of this, if Rs 10 lakh is at 9% per annum interest rate, and the balance Rs 5 lakh is at the same interest rate, the EMI comes to Rs 13,824 per month.

The savings thus is Rs 652 per month, only for the first year, translating to Rs 7,824 as savings due to this scheme. This translates to a savings of 5% of EMI in the first year, and over the entire tenure of the loan, it works out to 0.25% savings of the total EMI paid.

Besides savings on your EMI, the second incentive doled out for developers may also help. Tax holidays given to developers for projects approved between April 1, 2007, and March 31, 2008, with a completion deadline on or before March 31, 2012, is likely to have an indirect benefit for the consumer. So if the developer chooses to pass on this advantage to the buyer, it could mean a lower price for them.

While developers do not say anything much about how they plan to pass on this benefit, they agree that it is mostly consumers in Tier-II and Tier-III cities who would benefit from the latest incentives announced by the government. “Metro cities would generally miss out from this list owing to high Floor Space Index (FSI) costs. But the overall affordable segment is bound to witness an increased activity post this initiative,” feels Rajeev Rai, vice-president, corporate, Assotech. The developer has its Windsor Hills project in Gwalior and The Metropolis in Rudrapur, where consumers can opt for a home below Rs 20 lakh.

Similarly, BPTP too has projects in this category such as the Park Elite Floors starting at Rs 16.08 lakh that was launched in May 2009. They recently also launched the Park Elite Premium at Rs 17.98 lakh that caters to the middle income group. “The given scheme will indeed help end consumers investing in budget housing projects make way for lesser EMI and more affordability,” says Amit Raj Jain, vice-president – marketing, BPTP.

Some, however, are of the view that although the 1% interest rate cut will help, it should be extended to the Rs 30-lakh bracket. “In metros there are hardly any projects that cost less than Rs 20 lakh. This is primarily going to help buyers interested in a Tier III city. For metros this step almost amounts to nothing,” asserts Vijay Jindal, CMD, SVP Group. The developer has recently launched Gulmohur Garden phase II at Raj Nagar Extention NH-58 starting at Rs 16.53 lakh.

Mr Narvekar of E&Y adds that although the options in Tier I cities for Rs 20 lakh homes would be limited, there are some renowned developers such as Tata Housing that have come up with low cost projects like the Shubha Griha for homes in the sub Rs 10 lakh category. He, however, exercises a word of caution for the buyer.

“Though there will be a lot of choices, most of the upcoming projects are likely to be on city outskirts with a fair degree of travel involved in getting to the central business district. Also, consumers will need to be aware that most of the cost reduction on affordable housing has been achieved through reduction in the unit size and a cut-back on various frills that had become a part of most projects launched in the last 2-3 years.”

Source:  Economic Times

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