Government is taking huge steps to reform real estate with an aim to provide Housing For All by the year 2022. One the most significant measure taken by the government in this regard is their push for Affordable Housing. Affordable Housing intends to target the Middle Income Group (MIG), Lower Income Group (LIG) and Economically Weaker Section (EWS) demographic of the country, i.e. the strata which doesn’t own a home, earns in cash, lacks a fixed income and/or doesn’t have the required documents to secure a home loan.
To let these homebuyers get an access to India’s housing inventory, companies such as Investors Clinic came up with the swabhimaan scheme to assist homebuyers, who are financially capable of owning a house but due to lack of proper documents their loan applications gets rejected, to secure a loan; while the centre government brought in the Pradhan Mantri Awas Yojna and facilitated public banks to reduce their home loan interest rates.
Axis Bank first reduced their interest rates from 8.65% to 8.35% for loans up to 30 lakh. The ‘up to 30 lakh loans’ are the loans which target the Affordable Housing segment homebuyers. This interest rate cut by Axis was replicated by State Bank of India, ICICI Bank, HDFC Bank and Indiabulls Housing Finance. For salaried women borrowers, SBI and Indiabulls Housing Finance reduced interest rates from 8.6% to 8.35% on loans up to 30 lakh. ICICI and HDFC followed suit with the same interest rate on home loans as the above banks. Moreover, through PMAY (U), the centre government subsidized home loans by offering 3-4% interest subsidy on loans from Rs. 9 lakh to Rs. 12 lakh to encourage prospective first-time MIG homebuyers in urban areas to apply for a loan for their own home. Detailed reasons why housing sector is transforming for good through economical home loan rates are listed below –
A major advantage of reduced interest rates on home loans is that borrowers are pre-paying their loans. Pre-payment, especially when the interest rates are low reduces the borrower’s loan-balance significantly and saves them a good percentage in interest payments. Borrower pre-payment has increased the influx of money into the housing and related sectors which is benefiting the industry a lot and the industry is also passing on this benefit to customers.
Since April 1st 2016, banks are providing MCLR (marginal cost of lending rate)-linked loans which come with a floating interest rate and not a fixed base interest rate. This means that if RBI wants to pass on subsidy benefits to customers by reducing their repo rates, banks will have to reduce their MCLR too to be in-sync with the market standard and if MCLR is reduced, the home loan interest rate of a homebuyer is also reduced.
The reduction in home loan interest rates across the spectrum of banks is also prompting people to transfer their loan from their current bank to another bank which is offering lesser interest rates. Say, you are currently paying a 9% interest rate on your home loan but the collective market rate has descended to 8.5%. So if you want a reduced interest rate, you can ask your bank to match the market standard otherwise you will transfer. If the bank matches the market standard and reduces the interest rate, it involves less paperwork and costs for you whereas if you transfer to another bank you may have to pay high initial cost. In both the cases, transferring can result in good long-term interest savings. This increased competitiveness amongst banks to match the market standard is proving to be beneficial for homebuyers.
These cheaper home loan interest rates by major public and private sector banks have provided a much-needed boost to the majority of Indian population who are now confident of being able to own their dream home in the city they desire.
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