Zero Sum Proposal

The reduction in home loan rate will not boost realty sector as there are no houses available in large cities for less than Rs 30 lakh, while the cap for this lower interest rate is for loans up to Rs 20 lakh, says Prabhakar Sinha

The scheme of government to make available lower home loan rate to end-users remain a nonstarter. It will not help in reviving the sector, which is facing the worst downturn in the last 10 years, because of high interest rates.The small-ticket size of the loan that qualifies for the proposed low interest rate is the reason that will sink the proposed scheme.

Under the proposed scheme, government has asked banks to prepare a package to make home loan up to Rs 20 lakh available in the range of 7-8 per cent. According to banking sources, the banks are planning to offer home loan up to Rs 5 lakh at around 7 per cent and that of between Rs 5 lakh and Rs 20 lakh at around 8%. The present interest rate on home loan offered by public sector banks is around 10%.

But, the scheme is unlikely to benefit homebuyers in most cities in the country.This is mainly because there are hardly any apartments or houses available for up to Rs 25 lakh.Most of the properties available in the cities of National Capital Region, Mumbai, Chennai, Pune, Bangalore, Kolkata and Hyderabad are in the range of Rs 40 lakh to Rs 50 lakh.

Managing director of Unitech, Sanjay Chandra, said instead to fixing the cap at Rs 20 lakh across the country, the government should have fixed a different ceiling for different cities.He says a Rs 20-lakh-loan would be sufficient for small district towns,where land is not very costly.But in cities like National Capital Region of Delhi, land price is so high that even a 1,000 sq ft, 2-bedroom apartment cannot be sold at less that Rs 30 lakh in far flung areas. A threebedroom apartment in these areas will cost around Rs 35 lakh.

Thus, if one wants to take the benefit of low interest rate package of the government to buy a house, he will have to pay an upfront amount of Rs 10 lakh to 15 lakh from his own pocket. But, it has been found that most of the salaried people buying a house are unable to contribute more than 15 per cent of the total amount from their savings. That means, one can benefit from the government’s new package only if one were to buy a house costing around Rs 25 lakh. Even for this,one will have to dip into savings to make a Rs 5-lakh-payment upfront,and borrow the remaining Rs 20 lakh at special interest rates offered by the public sector banks.

It is learnt that a delegation of developers from NCR met government official recently to convince government to increase the ceiling of loan to qualify under the concessional rate of interest up to 8 per cent from the present Rs 20 lakh to Rs 40 lakh. They argued that this would help drive the demand in the sector.

Assotech CMD Sanjiv Srivastava said government is of the firm opinion that most of the loan seekers will be covered under the scheme. Finance secretary Arun Ramanathan has said that around 75 per cent of the loan is of less than Rs 7.5 lakh.

However, consultants say that most of these loans were taken before 2003, when the market was subdued. Besides, these loans were taken to buy houses in the small towns. In most of the large cities, prices of apartment and independent houses in the authorized areas are more than Rs 30 lakh. Srivastava says that if government increases the ticket size to Rs 40 lakh, the present scheme will help revive the sector. It will go a long way in arresting the slowdown in the economy.That fall in the interest rate from the present 10 per cent to 8 per cent and 7 per cent will go a long way in making the purchase of house affordable.

The fall in the interest rate by 3 percentage points on home loan up to Rs 5 lakh for 20 years will lead to reduction in EMI by 20 per cent from Rs 4,825 to Rs 3,876. However, on 10-year loan, the fall in EMI of Rs 5 lakh loan will be 12 per cent from Rs 6,608 to Rs 5,805.

But, if the loan amount goes up to Rs 20 lakh, the fall in the interest rate on 20-year loan by 2 percentage points will lead to reduction in the EMI by 13 percentage points from Rs 19,300 to Rs 16,729. In case of the repayment period of 10-year, the EMI will fall by 8 percentage points to Rs 24,265 from Rs 26,430.

In the case of Rs 40 lakh for 20 years loan also, the fall in the interest rate by 2 percentage points from 10 per cent to 8 per cent will lead to decline in the EMI by 13 per cent to Rs 33,458 from Rs 38,600. But, if loan tenure is reduced to 10 years, the EMI will fall by 8 per cent to Rs 48,531 from Rs 52,860.Therefore,the fall in the interest rates leads to fall in the EMI substantially, which will help drive the demand in the sector. This will increase the fund flow of in the sector, leading to rise in economic activities also.