Cheaper loans for affordable houses

For homebuyers with a budget of Rs 15-20 lakh, the finance minister’s Budget speech would have been music to their ears.

The finance minister proposed to raise the priority sector limit for houses from Rs 20 lakh to Rs 25 lakh. Priority sector broadly comprises agriculture, small-scale industries, road and water transport operators, small businesses, professional and self-employed persons, state-sponsored organisations for scheduled castes or scheduled tribes, education loan, housing loan, loans to self-help groups (SHGs) or non-governmental organisations (NGOs) and so on.

Sushil Munhot, executive director & head-personal banking, IDBI Bank, says, “Any housing loan of up to Rs 25 lakh will come under priority sector lending, as it is to provide affordable housing. But we do no know when will it come into effect.” There is a circular from the Reserve Bank of India (RBI) expected shortly, which will give details of the priority sector lending, say bankers.

While priority sector lending is more of a mandate for banks, borrowers can benefit from these.

Lower interest rate
Normally, loans falling under priority sector (less than Rs 25 lakh henceforth) are priced more attractively, say bankers. “Such loans are cheaper by 50 basis points than other home loans,” says Munhot.

And, given that interest rates have been rising consistently for some time, the little benefit can act as an incentive. However, some others feel that the skyrocketing price of properties in metropolitan cities may not allow this small cut to look as attractive. “Raising the priority home loan limit is good for lower income group. But it will do nothing to ease the pain in the metropolitan cities where real estate prices are high,” says Anuj Puri, chairman and country head, Jones Lang LaSalle India.

Higher loan
The central bank has mandated banks to sanction only up to 80 per cent of the loan amount or the loan-to-value (LTV) in banking parlance, which can be higher in case of loans falling under the priority sector.

“In order to prevent excessive leveraging, the LTV ratio in respect of housing loans should not exceed 80 per cent. However, for small-value housing loans, that is, loans up to Rs 20 lakh, it has been decided that LTV can go up to 90 per cent,” says an RBI circular dated December 23, 2010.

Kamlesh Rao, head-home & personal loan division, Kotak Mahindra Bank, says, “One will have to shell out Rs 6 lakh for Rs 30 lakh loan, whereas one with a Rs 25 lakh loan will have to pay Rs 2.5 lakh upfront.” So, a sub-Rs 25 lakh home loan may save some margin funding.

Interest rate subsidy
The government has extended the one per cent interest rate subvention on housing loans for up to Rs 15 lakh, provided the cost of the house is lower than Rs 25 lakh. Till now, this subsidy was available on loans of up to Rs 10 lakh for a house costing less than Rs 20 lakh. It will come into effect only from April this year, as the previous norm was effective from October 2009 to March 2011.

For a Rs 15 lakh loan, you will be able to save Rs 15,000, which will be debited to your account by your bank, says a senior Canara Bank official. “However, this subsidy will be applicable only for the first year of the loan,” the official adds.