Who will benefit from cheaper loan terms?

S. C. Dhall 

To give a boost to the mission of 'Housing for All by 2022' and also address the urban poor’s housing requirement, the  Pradhan Mantri Awas Yojana  (PMAY) is being reworked. Of the four verticals of the scheme, ‘Promotion of affordable housing for weaker section through credit linked subsidy’ is the one that would appeal to the urbanites the most. There are two important changes being made to the scheme. 

Type of housing project 

To qualify for the scheme, the house has to be within the definition of affordable housing. According to the Housing for All   (Urban) Scheme Guidelines March, 2016 issued by the Ministry of Housing and Urban Poverty Alleviation, a project where at least 35 per cent of the houses are constructed for the EWS category will be called an affordable housing project. So if one wishes to buy a home in an upmarket project that hasn’t got any allocation towards affordable housing, the scheme simply won’t apply. 

Who all are eligible? 

The first eligibility condition is that the person (beneficiary) who applies for the scheme should not own a pucca house (an all weather dwelling unit) either in his or his family member’s name in any part of India. A beneficiary family will include husband, wife and unmarried children. 

The second eligibility involves the beneficiary’s income level. EWS households are defined as households having an annual income up to Rs 3 lakh. An EWS house means a single unit or a unit in a multi-storeyed super structure having a carpet area of up to 30 sq. m., with adequate basic civic services and infrastructure services like toilet, water, electricity, etc. 

Remember, carpet area is the area enclosed within the walls, the actual area to lay the carpet on. This area does not include the thickness of the inner walls. Built-up area is the gross area of the flat which comprises the carpet area as well as the thickness of the walls and the ducts, and it can be 15-25 per cent more than the carpet area and sometimes known as the plinth area. 

LIG households are defined as households having an annual income between Rs 3 lakh and Rs 6 lakh. An LIG house means a single unit or a unit in a multi-storeyed super structure having carpet area of up to 60 sq. m., with adequate basic civic services and infrastructure services like toilet, water, electricity, etc. However, the states/Union Territories have been given the flexibility to redefine the annual income criteria as per local conditions, in consultation with the Centre. 

The beneficiary, at his discretion, can build a house of larger area, but the interest subvention would be limited to first Rs 6 lakh only. 

Subsidised interest 

No matter how much loan one takes, the 6.5 per cent subsidised interest rate will apply only up to Rs 6 lakh. The credit-linked subsidy will be available only for loan amounts up to Rs 6 lakh and such loans would be eligible for a 6.5 per cent interest subsidy. Any additional loans beyond Rs 6 lakh will be at a non-subsidised rate. 

Interest subsidy will be credited upfront to the loan account of the beneficiaries through lending institutions, resulting in reduced effective housing loan and equated monthly instalment (EMI). 

So, if you take a  home loan  at a 9 per cent rate, you will pay only 2.5 per cent interest on Rs 6 lakh and 9 per cent on the remainder. 

The subsidy will be credited to the borrower’s account upfront by deducting it from the principal loan amount. As a result, the borrower will pay EMI on the remainder of the principal loan amount. For instance, if the borrower avails a Rs 6 lakh loan and the subsidy thereon works out to Rs 2.20 lakh then this amount (Rs 2.20 lakh) would be reduced upfront from the loan (i.e., the loan would be reduced to Rs 3.80 lakh) and the borrower would pay EMIs on the reduced amount of Rs 3.80 lakh. 

For all the slabs, the scheme will apply to loans with tenure of up to 20 years, as against the limit of 15 years now. 

The subsidy saga

Home loans for buyers from the economically weaker sections will now come cheaper, with the government announcing an interest subsidy for borrowers with an annual income of up to Rs 6 lakh. Beneficiaries would now receive a 4 per cent interest subsidy on a loan of up to Rs 9 lakh, and 3 per cent for a loan of up to Rs 12 lakh.

This means that if a beneficiary takes a housing loan of up to Rs 9 lakh with an interest rate of 9 per cent, their EMIs would be calculated at 5 per cent. If the loan is up to Rs 12 lakh and the interest rate 9 per cent, the effective rate would be 6 per cent.

 First, while the existing guidelines are aimed at the economically weaker section (EWS) and the lower income group (LIG) category, earning Rs 3 lakh and Rs 6 lakh per annum respectively,   people earning up to Rs 12 lakh and Rs 18 lakh per annum have also been brought into the fold of these subsidies. 

Second, as per Budget 2017, the 30 sq m (carpet area) limit will apply only in case of municipal limits of four metropolitan cities, while for the rest of the country, including the peripheral areas of metros, the limit of 60 sq. m. will apply. 

A 60 sq. m. carpet area is close to 100 sq. m. of built-up area as nearly 30-50 per cent is the loading. And 100 sq. m. is nearly 1,000 sq. ft., which is generally the size of a 2 BHK in several locations. This move has made affordable housing scheme accessible to many people living in urban areas now. 

According to quick calculations, the 4 per cent subsidy on a loan of Rs 9 lakh would translate to a discount of Rs 1,98,300 on the principal amount. The EMIs on a loan taken for 15 years would come down from Rs 9,128 to Rs 7,117 per month.

The government already provides a subsidy of 6.5 per cent on home loans of up to Rs 6 lakh under the Prime Minister Awas Yojana (PMAY).

From where you can avail the loan

The loan can be availed from any primary lending institution (PLI) such as a bank or a housing finance company. For the purpose of identification as an EWS/LIG beneficiary under the scheme, an individual loan applicant will have to furnish self-certificate/affidavit as proof of income to the bank. 

But unlike a normal loan, one has to be careful while transferring subsidised loans to another bank. If a borrower has taken a housing loan and availed of interest subvention under the scheme but switches to another PLI for balance transfer later, such beneficiary will not be eligible to claim the benefit of interest subvention again.