Buying houses, particularly in the affordable range, has become even easier. If a first-time homebuyer avails all the facilities and benefits, the EMI on a home loan of Rs 30 lakh can be brought down by as much as 23%–down to Rs 20,725, from Rs 26,320.
The reduction in EMI also increases the limit on the amount that a financial institution can lend to a borrower. In the last one month, most banks have cut interest rates by around 30 basis points. Banks have also increased the tenure of the repayment period to 30 years. Besides, in order to promote housing, the Union government is also giving interest subsidies on a home loan to first-home buyers under Pradhan Mantra Awas Yojana (PMAY).
Under the scheme, a person with a household income of Rs 6 lakh will get an interest subsidy of 6.5% per annum on a loan of up to Rs 6 lakh to buy his first house. If the income is up to Rs 12 lakh, he can avail an interest subsidy of 4% on a loan amount of up to Rs 9 lakh. If the household income is more than Rs 12 lakh but less than Rs 18 lakh, the government will give a subsidy of 3% on a loan of up to Rs12 lakh.
The subsidy is given at the start of the repayment period and adjusted against the capital borrowed.According to one calculation, the net benefit that accrues to a homebuyer is around Rs 2.60 lakh.
The country’s largest lender, State Bank of India (SBI), has assured borrowers that a customer eligible for a home loan can avail an interest subsidy of Rs.2.67 lakh under the PMAY scheme. Most of the banks have cut the rate on a home loan of up to Rs 30 lakh to 8.35% as shown in the chart, from 8.65%. SBI, too, announced a rate cut in home loans by 25 basis points–to 8.35% per annum.The interest rates on loans above Rs 30 lakh have also been cut but by lesser magnitude. At present, IDBI Bank has pegged its home loan rate at one of the lowest levels–8.30%–that too without any cap on the loan amount.
On a 20-year repayment period, the EMI on Rs 1 lakh loan at 8.65% is around Rs 877. With the cut in the rate by 30 basis points, the EMI goes down to Rs 858. But if one takes a loan for a 30-year period, the EMI comes to only Rs 758. When this is adjusted with the interest subsidy of PMAY, the net EMI on a loan of Rs 30 lakh will be only Rs 20,725, which is equivalent to Rs 690 per Rs 1 lakh loan.
A buyer taking a loan under the floating interest rate must borrow for the longest available tenure.Under the floating rate scheme, there is no penalty for prepayment of the entire outstanding amount or part prepayment of the outstanding. At the same time, the extra amount paid during the repayment tenure will be directly deducted from the principal amount and interest on the amount paid will not be calculated anymore. Therefore, it will automatically lead to a reduction in the repayment period.
But if you borrow for the smaller repayment period, your EMI will be higher and chances of default will be higher. Therefore, it is better to borrow for a longer period and prepay the extra amount that you can every month or whenever you can. During the initial period of the repayment tenure when your income is less, you just pay the EMI. Later, as your income increases, you can start prepaying the loan amount without attracting any penalty.
As the real estate market is going through a slowdown, prices of real estate have fallen substantially.At the same time, the interest subsidies on home loan for the middle-income group with a household income between Rs 6 lakh and Rs 18 lakh is available only till the end of 2017.