Betting on budget homes

BUDGET POSITIVES

Arguably, the biggest push for housing has come from the fact that the existing scheme of interest subvention of one per cent on housing loans has been further liberalised by extending the same to housing loan upto Rs 15 lakh (presently, Rs 10 lakh) where the cost of the house does not exceed Rs 25 lakh (presently, Rs  20 lakh). The move to increase the priority housing loan limit is being viewed as a positive step that will lead to increasing the base of home loan borrowers and thereby a boost for affordable housing.

 Interest subvention on housing loans is extended by one year which again aims at providing a boost to the affordable housing and low cost housing. Opines J C Sharma, MD, Sobha Developers Ltd., “Interest rate on affordable housing will remain attractive and likely to be in the band of 8-9% per annum in the near future even in the context of current, increasing interest rate scenario. To keep the sustained growth in housing sector and also in the financing activities by banks for housing sector, the existing housing loan limit for dwelling units under priority sector lending is proposed to be enhanced from Rs 20 lakh to Rs 25 lakh. This also factors the increase in prices of residential properties in urban areas. Financial institutions and banks are expected to step up their priority sector lending, which means a healthy trend for meeting housing loan needs of the consumers.” The benefit of investment linked incentive is proposed to be extended to the specified business of 'developing and building of affordable housing segment' u/s 35AD(8) (c).

Implications

The finance and banking sectors are expected to see significant improvement in their earnings and improved corporate credit profiles likely to ease asset quality. Housing finance companies are also likely to be benefited due to increase in demand and better off take of credit.

The budget proposes to enhance the provision under Rural Housing Fund Rs. 3000 crores from existing Rs. 2000 crores to provide housing finance to targeted groups in rural areas at competitive rates. "This may improve the demand for housing in Tier II & Tier III cities so also the lending to housing sector by banks and institutions.

It is proposed to create a Mortgage Risk Guarantee Fund to enhance the credit worthiness of EWS and LIG households. Setting up of Central Electronic Registry to prevent frauds in loan cases involving multiple lending on the same immovable property," says Sharma.

Explains Uday Dharmadhikari, CEO - Usha Breco Realty, "earlier the benefit of 1% subvention scheme was on a loan amount of Rs10 lakh i.e. maximum benefit in interest was Rs. 10,000/- now with increase limit of Rs 15 lakh more people will be covered in the net and the maximum benefit will be to the tune of Rs 15,000.” Says Chandrashekar Hariharan (Chairman & Co Founder BCIL Zed Homes), “Incentives for developers executing low-cost housing projects has been much overdue and it's good to see the government finally providing some relief here. 

A huge opportunity exists for developers who are willing to cater to the bottom of the pyramid and sell homes priced between Rs 4 lakh and Rs 8 lakh a unit targeted at the lower income classes. So far, developers have been avoiding this sector due to several factors such as high cost of land and difficulty in obtaining home financing thereby making such projects economically challenging. However with the incentives included in this budget and hopefully additional incentives to follow, developers will be encouraged to look at this segment a little more closely and assist in providing sustainable housing solutions for India’s large population belonging to the lower income classes.” Though, it is being argued that this incentive is less likely to have any major impact on prospective consumers in Tier 1 cities, considering the cost of property in these areas exceed well over Rs 25 lakh and do not fall within the purview of priority lending.

"But overall, the change in lending norms will improve capital availability for the lower income segment in other towns and cities from banks, considering priority sector lending receives lower weights and therefore capital adequacy requirements for lending institutions are lower.

Also, on the same loan value and tenure as earlier, consumers will now be paying a lower effective rate of interest bring down loan EMIs by a small margin," opines Sachin Sandhir, MD & Country Head, RICS India.

Impact

At present, housing shortage in India is over 25 million housing units. The allocation of Rs 58,000 crore to Bharat Nirman projects and proposal to set up Mortgage Risk Guarantee fund for rural housing is going to help developers in creating quality housing projects in rural parts of India.

Creation of an Infrastructure Debt Fund to boost infrastructure funding and to increase spending in this critical area by 23 per cent and reluctance of banks to lend is set to ease for ongoing and new projects. Opines R.C Gupta, MD, RPS Group, “Although affordable housing sector and banking sector will get the boost from the declaration of this budget as now the home loan portfolios of the banks will be improved subsequent to the liberalisation of interest subvention scheme. Investment in affordable housing segment will be encouraged because of proposed investment linked tax deduction for the affordable housing projects. Further, the banks have already been vigorous in retail housing loan and now the higher limit for priority sector housing loans will also enable banks to meet their priority sector target more easily.”

 According to Snehdeep Aggarwal, Founder-Chairman Bhartiya Group, “in metropolitan cities like Mumbai and New Delhi, where real estate prices have escalated exponentially in the last one year, the demand for affordable housing is much higher, and these home loans would only benefit people in the distant suburbs.
It is not clear what plans the Government has for social housing in the below Rs 5-10 lakh segment; this segment is not catered to by the regular commercial housing finance institutions and hence these people are at the mercy of money-lenders and micro-finance institutions - who charge much higher rates of interest."
Agrees Shashank Agrawal - Director IndiaCube.com, "the only ironical situation is that these sops will only benefit people living in smaller cities, whereas it will not serve any purpose in big metropolitan cities, where no independent house is available below Rs 30 lakh range.”

The formation of the Mortgage Risk Guarantee Fund for housing loans taken by Economically Weaker Sections (EWS) and Low Income Groups (LIG) will be a creditworthiness boost to that segment.

“This may make housing loans available at more attractive interest rates and loan-to-value ratios. And even bring a certain credit spectrum into the lenders’ radar, maybe with lower value products like home improvement loans. The mortgage risk guarantee fund will seek to stabilise a higher risk loan by guaranteeing that a portion of it will be made good to lenders in case of default.

So if the asset price is 100 and the loan given is 80, then say, if the fund guarantees 20% then 20% of 80 (or whatever is the principal outstanding) = up to 16 will be made good to the lender in case the borrower defaults and the loan becomes irrecoverable,” says Vinaya Chandran, Vice President - Strategy Markets, CoreLogic Global Services Pvt. Ltd. Manoj Paliwal, Chief Financial Officer, Omkar Realtors & Developers Pvt. Ltd. adds, “additional benefits related to investments in the affordable housing segment are valuable for the real estate sector.  Further, as per announcement by the Finance Minister, Central Electronics Registry will become operational by March 31,  2011. This will be a big boost for the entire real estate sector as it will help reduce the number of frauds in the loan segment.”

Case study

Mr X, a State government employee with an income of Rs 20,000 a month has enough savings for down payment. He intends to take a housing loan for 20 years.
Let’s assume he takes Rs 10 lakh loan as per last year’s limit from HDFC Ltd at its current retail prime lending rate of 15.5% (applicable from March, 01). His pre and post subsidy EMI comes to around Rs 13,539 and Rs 12,800 respectively (Using HDFC Calculator), with the net saving being Rs 739 per month and Rs 8,868 for the first 12 months. And as shown with the calculations, with the proposed housing loan limit hiked to Rs 15 lakh, Mr X can save additional Rs 370 per month for the first 12 EMIs.

So apart from increase in affordability, the proposed step would mean a higher saving on interest subsidy. Further, to make use of the maximum subsidy, it is wise to opt for longer repayment tenure, up to 20 years, under which EMIs will be smaller and you have the option of making part prepayments (normally banks and finance companies will not charge any penalty) later on. In the above example, if Mr X takes a loan for 10 years, his gross savings are reduced to Rs 11,016. However, one should be cautious while selecting tenure. The subsidy benefit exists for only first 12 EMIs and longer tenure selected (say 20 years) would have high component of interest. So while you benefit during the first year, you might end up paying more interest over 20 years, especially in rising interest rate scenario like we are witnessing at present.

For priority sector lending, RBI allows banks to determine their interest rates for loans higher than Rs 2 lakh. Most banks allow incentives worth up to 1% reduction in interest rates for priority sector advances. E.g. Karur Vysya Bank was offering priority loans to housing sector at 11.5%, compared to 12.5% for home loans more than Rs 20 lakh (Say Rs 25 lakh).

Now, post budget that loan worth Rs 25 lakh would attract priority lending status and hence benefit of reduced interest rates. Continuing our last example, Mr X would have to shell out an EMI of Rs 28,404 for an Rs 25 Lakh loan from Karur Vysya Bank pre budget, which goes down to Rs 26,661 post budget as his loan now would fall within priority lending.