How cheaper mortgages, innovative schemes are making home ownership more affordable

Propelled by the RBI’s series of repo rate cuts, the typical mortgage interest rate from prime lenders today is around 7% per annum.

Events of the recent past have fostered as renewed desire for stability in the form of home-ownership across the nation. Aside from being a safe haven in times of uncertainty, a home offers financial and emotional security to its owner. These facts, along with the vastly enhanced stakeholder commitment towards easing the process of home ownership, have resulted in resurgent sales and registration numbers in the past few months. Developers, financial institutions and the government have offered various schemes to buyers to incentivise home-ownership.

Developers have launched projects and devised schemes which foster affordability. Homes in cities like Mumbai are expensive – the city is land constrained and input costs (government premiums, land costs and recently, commodities) are dearer here than in most other places in the country. The regulatory environment is complex and capital markets for all but the largest of players are broken. These factors invariably end up making the cost of the home prohibitively expensive for most. Developers have recognised this and have planned more affordable projects and offered various schemes which attempt to alleviate it.

Flexible or deferred payment plans offered by developers are one way in which affordability is enhanced. These schemes allow for the buyer to structure the payment of her instalments in a manner which suits her finances. They provide comfort to the consumer with respect to progress – significant payments are made when the project is significantly developed – and also reduce her mortgage interest burden when compared to a standard construction linked payment plan, making the overall cost of the purchase smaller.

Mortgage lenders too have played a role in enhancing home affordability. Propelled by the RBI’s series of repo rate cuts, the typical mortgage interest rate from prime lenders today is around 7% per annum. This is down from close to 10% per annum only a few years ago. The tenure offered on these loans has also increased – some banks offer 25-year mortgages today, compared with 20-year mortgages previously. The effect on affordability is staggering. An example will illustrate this. For a Rs 5 million mortgage in the past (assuming it was a 20 year term and was priced at 10% per annum), the home-buyer typically saw an EMI of Rs 48,250 per month. Over the term of the loan, she would pay Rs 6.58 million in interest.

Contrast this with a 25-year mortgage at 7% for the same Rs 5 million. The EMI is Rs 35,340 per month and the buyer pays Rs 5.6 million in interest (whilst enjoying the loan for 5 more years). Not only does she have more monthly disposable income, but the overall cost of owning the home is much lower. Furthermore, home loan rates are even lower for women borrowers, as lenders offer interest concession on properties with a woman owner or co-owner – an important social initiative.

The government has played a role too. Under the Credit Linked Subsidy Scheme (CLSS) of the Pradhan Mantri Awas Yojana (PMAY), eligible buyers from the Economically Weaker Section (EWS) up to the Middle Income Group II (MIG II) are entitled to a subsidised rate of interest on their mortgage borrowings (up to Rs 6 to 12 lakh, depending on the category of buyer). The EWS buyer is entitled to an interest subsidy of 6.50%, on borrowings of up to Rs 6 lakh. For the MIG II borrower, the interest subsidy is 3.00%, on borrowings of up to Rs 12 lakh. Through this scheme, the EWS borrower gets the subsidy of up to Rs 2.67 lakh upfront, upon making the purchase and the MIG II borrower up to Rs 2.30 lakh. The government delivers this subsidy through public and private banks, NBFCs and housing finance companies, reducing the regulatory burden on the borrower. Homes, as a result, are more affordable and easier to purchase.

The Government of Maharashtra too has taken steps of its own. Its recent measures sought to solve the twin problem of enhancing affordability to the buyer will also provide the sector a fillip after the impact it faced due to the COVID-19 induced pandemic. The first measure introduced was a reduction in stamp duty on property purchases across the state by 3% and 2% until 31st December 2020 and 31st March 2021, respectively. This spurred affordability – the Mumbai Metropolitan Region saw a record 75,601 property registrations between September and December 2020 and 94,401 registrations between January and March 2021.

Whilst the stamp duty reduction came to an end, the Government has allowed developers to opt for a 50% reduction in the key premiums they pay going forward, provided they absorb the cost of stamp duty on behalf of new purchasers in those projects. This reduces development costs – therefore mitigating some of the pain inflicted on the industry by the events of last year, whilst also significantly reducing upfront transaction costs for the buyer.

Innovative schemes, cheaper mortgages and important government measures have come together to make home-ownership much more affordable. The current landscape is as dynamic as ever and there is significant commitment from all stakeholders in making home ownership easier and more affordable.

(By Jay Goenka, Director, Dynamix Group)