Increasing home loan interest rates in India have had repercussions on the demand for such loans. They have augmented borrowing costs, resulting in higher monthly interest payments for borrowers. Consequently, this has decreased affordability and reduced loan eligibility for prospective borrowers, especially first-time homebuyers.
“It is advisable to choose a property that fits one’s budget and lifestyle and to avoid overspending or borrowing beyond one’s means,” says Anuj Sharma – Chief Operations Officer – IMGC (India Mortgage Guarantee Corporation) in an Interview with BT Money Today. Edited excerpts:
BT: What do you think about the specific difficulties faced by first-time Indian homeowners, as well as the role that mortgage guarantees could play in expanding homeownership opportunities in India?
AS: A mortgage guarantee is a credit default guarantee taken by banks and housing finance companies (HFCs) to manage the credit risk in case a borrower defaults on their home loan. A mortgage guarantee can improve access to homeownership in India by enabling lenders to offer higher loan-to-value (LTV) ratios, longer loan tenures, and more flexible eligibility criteria to potential homebuyers. It can also reduce the burden of down payments and encourage more affordable housing projects in the country.
While searching for their ideal home, first-time Indian homeowners encounter a number of obstacles; some of them
Low or nonexistent credit score: One’s creditworthiness and payback history are gauged by their credit score. Because lenders view a lower credit score as a larger risk of default, it might affect a borrower’s eligibility for and interest rate on a house loan. As a result, it’s critical to keep your credit score high by paying your payments and debts on time, refraining from applying for loans more than once, and routinely reviewing your credit report for inaccuracies.
Financial restrictions: Purchasing a home is an expensive long-term investment that has to be carefully planned and budgeted for. The price of the property, the down payment, and the monthly payments on a house loan, the upkeep costs, the taxes, and the insurance must all be taken into account. Future earnings and expenses, as well as any crises or eventualities, must also be taken into account.
Poor understanding of the process: Buying a home involves a lot of paperwork, legal formalities, and technicalities that can be confusing and overwhelming for first-time homebuyers
Therefore, it is advisable to choose a property that fits one’s budget and lifestyle and to avoid overspending or borrowing beyond one’s means.
BT: What are the biggest challenges young people and first-time home buyers face in securing affordable home loans today?
AS: Obtaining inexpensive home loans is currently one of the largest obstacles facing young people and first-time home buyers in India. These issues include:
High-interest rates: Compared to many other nations, India has an average interest rate for house loans of about 8.5%. This lowers the borrowers’ eligibility for loans and increases the cost of the monthly repayments.
Limited availability of affordable housing: In India, there is a deficit of 18.78 million urban housing units, 96% of which are in the EWS and LIG sectors, according to a Knight Frank assessment. This indicates that there is a significant discrepancy between the nation’s supply and demand for reasonably priced housing, which raises property values and makes it challenging for low- and middle-income
There are stringent eligibility criteria and documentation processes and a lack of awareness about government schemes.
BT: How have rising interest rates impacted the demand for home loans in India, and how are rising interest rates impacting first-time homebuyers?
AS: The demand for house loans in India has been affected by rising interest rates in a number of ways. They have made borrowing more expensive and raised monthly interest payments for borrowers, which has decreased their affordability and loan eligibility.
Higher interest rates have affected the supply and demand dynamics of the real estate market by reducing developer profitability and investor appeal. They have also deterred many prospective homebuyers from applying for home loans, particularly for long-term loans, as they fear more rate hikes and uncertainty in the future.
Higher rates have made it harder for first-time homebuyers to save up for the down payment, which is usually a significant percentage of the property value. Options and flexibility for first-time homebuyers are largely limited, as they may have to compromise on the size, location, or quality of their desired home or opt for shorter loan tenures or higher LTV ratios. Impacts overall capacity to pay, as the buyers may face difficulties in repaying their home loans in case of income shocks, job losses, or health emergencies.
Also Read: Will your home loan EMI fall despite the repo rate hike pause?
BT: What are the short-term and long-term consequences of high loan rates for the housing market?
AS: Since high-interest rates make borrowing costlier and out of reach for many prospective buyers, they may temporarily decrease demand for home loans and purchases. This may have an impact on developers’ cash flow and profitability, as they might need to provide incentives or discounts to draw clients.
Excessive lending rates may also put lenders at greater risk of default and non-performing assets (NPAs), particularly if borrowers experience job losses or income shocks as a result of the recession. In the long term, high lending rates may impede the expansion and progress of the housing industry, a major engine of the Indian economy which roughly contributes to about 6% of the GDP and generates employment for about 50 million people.
BT: What kind of tax savings are you expecting from the upcoming budget in July 2024?
AS: The upcoming Union government of India budget in July 2024 may offer some tax sops for homebuyers and the real estate sector
Raising the maximum deduction under Section 80C from the current Rs 1.5 lakh to Rs 2.5 lakh for home loan principal repayment.
Raising the maximum allowable deduction for interest paid on home loans from the existing Rs 2 lakh to Rs 5 lakh, with special consideration for the affordable housing market.
Adding properties up to Rs 50 lakh in non-metropolitan areas and Rs 75 lakh in metropolises to the concept of affordable housing. The real estate industry’s industry status to facilitate simpler financing, reduced interest rates, and tax advantages
BT: What are the key factors beyond interest rates that should be considered when deciding to buy a house?
AS: Aside from interest rates, other elements can affect your home purchase decision. Among the crucial elements are:
Location and connectivity: You should consider how easily accessible and close to important facilities are, like marketplaces, hospitals, schools, and transit hubs. To guarantee ease of commuting, you should also verify the accessibility to major roads, highways, and public transportation.
Property size and type: Whether it’s a land parcel, apartment, or villa, you should choose a property that best meets your needs. Along with these factors, you should consider the property’s size, room count, and parking availability. Selecting a property that meets your present and future needs is critical.
Budget and affordability: Make sure your spending plan is reasonable.
Legal documentation and due diligence: You should ensure all legal documentation related to the property is in order. Conduct a thorough due diligence of documents Seek legal advice and engage the services of professionals to ensure a smooth and legally sound transaction.
