As the ongoing COVID-19 pandemic continues to challenge us on health as well as economic front, it’s listing huge gaps in these sectors which were unnoticed in the pre-coronavirus outbreak time. At the same time, the pandemic, gaps apart, has thrown many opportunities which can be capitalized for better living in post-COVID situation. In view of the nature of this column let me deal with one such specific opportunity which is calling in housing sector.
Like any other basic human need, housing has always remained (and will continue to remain) in demand. To fulfill this demand, home loan is important source of finance for buying or constructing a home. And when we talk of the loan component, it is important that home loan is affordable and convenient to repay.
The pandemic situation has established that owning a house is one of the key factors to deal with the uncertainties. Besides, it has also emerged as a fact that having real estate as an asset class in investment basket is golden investment compared to the highly volatile equity market which is loaded with huge risks.
Notably, the Reserve Bank of India’s (RBI) monetary policy decision earlier in March 2020 to slash repo rates by 0.75 basis points (bps) has made home loans significantly attractive. Now the interest rates on home loans by banks stands to their lowest in over a decade.
Many readers during these times of COVID crisis have continuously been asking about the means and ways of accessing home loan facility in a hassle free manner. And some have asked about the subsidy component in housing loans. There are some who have listed their need for small amount of loan to meet housing needs. But, they say, host of formalities keeps them away to avail the housing loan facility. There is also a segment of readers who are on a look out for best deals in shopping a housing loan. Overall, every one of them, precisely, has sought guidance for availing a housing loan.
Let me now respond to varied queries posted by readers intending to take route of housing loan scheme to realize dream of having their own house.
Is there any subsidy option in housing loan scheme?
Of course, there’s government’s housing subsidy scheme for households that fall under the middle-income group (MIG) category. A good news is that the central government has already extended the benefit of interest rate subsidy on home loans under the Credit Linked Subsidy Scheme (CLSS) for households with annual incomes between Rs.6 lakh and Rs.18 lakh till 31 March 2021. The scheme was introduced in May 2017 and was supposed to end on 31 March 2020.
What is the mechanism of this credit linked subsidy scheme (CLSS)?
The scheme falls under the Pradhan Mantri Awas Yojana (PMAY) for MIG households. Here, middle-income beneficiaries with annual household income between Rs.6 lakh and Rs.12 lakh (categorized as MIG I) get an interest subsidy of 4% on a 20-year loan. Annual household incomes of more than Rs.12 lakh and up to Rs.18 lakh (categorized as MIG II) get interest subsidy of 3% on a 20-year loan.
Notably, the subsidy in case of MIG I, is available only on a loan amount of Rs. 9 lakh even if the total loan amount is higher than that. In MIG II category, the subsidy is available up to a loan amount of Rs.12 lakh even if the total loan amount is higher. The scheme is applicable only to those families where none of the family members own a pucca house in their names in any part of India.
It’s notable that the scheme for MIG I is available for acquiring or constructing a house (including re-purchase) with a carpet area of up to 160 square metres. For MIG II, this limit is 200 sq.m. The house must have basic infrastructure such as water, sanitation, sewerage and access to road and electricity.
What’s the exact amount of subsidy which an eligible borrower can get?
Those in the economically weaker section (EWS) and low-income group (LIG) categories can get a maximum subsidy of Rs.2.67 lakh, whereas for MIG I and MIG II categories, the subsidy limit is Rs.2.35 lakh and Rs.2.30 lakh, respectively.
What’s the mode of payment of this subsidy?
The subsidy gets credited upfront to the loan account of the borrower. By this way, it reduces the outstanding loan amount and brings down the equated monthly installments (EMIs). Let me explain. If you fall in MIG II category and take a home loan of Rs.12 lakh, the subsidy amount will work out to approximately Rs.2.30 lakh. This amount will be reduced and the loan amount will come down from to Rs.9.7 lakh. Which means you have to repay Rs. 9.7 lakh instead of Rs.12 lakh. Consequently, your EMI will be fixed for the outstanding loan amount of Rs.9.7 lakh.
It’s worth mentioning that to avail the benefit of this scheme, you can seek home loans from banks, housing finance companies and any other lending institutions.
What are the factors that should be considered before approaching bank for availing the facility?
First of all you have to decide about your loan amount. Do it by considering your monthly income, your age, other debts and financial commitments. You should even take into your job stability. Precisely, your loan amount should not make your repayment a challenging that leads to debt trap.
After deciding your loan amount, you should decide about repayment tenure of the loan. When your loan tenure is for short period, your equated monthly instalment (EMI) will be very high. Longer tenure is generally chosen to enhance the loan eligibility of borrower but remember longer the tenure greater is the cost of borrowing. If EMI for short term is not affordable and you want to pay off your loan as soon as possible, consider middle path for the period of 10 to 15 years.
Then it is important to consider interest rate. You can either consider fixed rate or floating rate of interest. Fixed rate of interest remains fixed for the entire tenure of loan irrespective of change in interest. Floating rate is chosen by borrowers who expect the rates to fall in the future and want to benefit by it. A hybrid loan is a combination of fixed and floating loans. Borrower can lock a portion under fixed and leave the remaining under floating rate.
Is it advisable to get the loan amount insured?
After availing the home loan facility, it’s important to go for insurance of your home loan amount. It will enable you to repay your loan in cases of accident, death, sickness or loss of job. If your home loan is insured and in future if you are unable to repay your home loan due to sickness, loss of job or death, your insurance company will payoff your loan and avoid burden of home loan. It is highly recommended for home loan insurance to ensure that your family still has a home in case of your death or sickness or loss of jobs.