EMIs of affordable housing loan jump over 20% in last 2 years

Floating interest rates for home loans up to ₹30 lakh shot up to 9.15% in 2023 against from 6.7% in 2021; EMI amount jumps to ₹27,300 to ₹22,700

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Mumbai: In the Indian residential real estate market, affordable housing suffered the greatest impact of the Covid-19 pandemic—and unlike the other segments—has not recovered in the last two years. With buyers of this segment increasingly desisting from purchase decisions, affordable housing sales are languishing, and developers have accordingly curtailed its supply.

A recent report by Anbarock group finds that the share of affordable housing in overall sales in H1 2023 shrunk to approx. 20% – an 11% decrease against the corresponding period in 2022. Likewise, in the top 7 cities, this segment’s share in the overall housing supply in H1 2023 plunged to 18%, against 23% in H1 2022.

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The mounting desolation is not helped by the fact that affordable home buyers have been paying almost 20% more in their equated monthly instalments (EMIs) over the last two years. The floating interest rates for home loans up to ₹30 lakh have jumped up from 6.7% in mid-2021 to nearly 9.15% today.

Prashant Thakur, regional director & head–research, Anarock Group, says, “Home loan borrowers who were paying an EMI of ₹22,700 in July 2021 are now paying ₹27,300 today—an increase of ₹4,600 per month. This 20% increase in the EMI has resulted in a jump of ₹11 lakh in the overall interest component-from ₹24.5 lakh interest payable in 2021 to ₹35.5 lakh today.”

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The total interest payable over a 20-year tenure is now more than the principal amount. If a buyer seeks to buy a property worth <₹40 lakh, factoring in the LTV (Loan to value) ratio, the total borrowed amount is ₹30 lakh for a tenure of 20 years. In this scenario, the buyer would have paid an EMI of ₹22,700 in 2021, when the interest rates stood at about 6.7%.

“At this rate, the total repayment to the bank was ₹54.5 lakh, of which the interest component was ₹24.5 lakh – less than the total principal amount,” says Thakur. “Today, when home loan interest rates hover at around 9.15%, this buyer’s EMI is approx. ₹27,300. The total repayment to the bank at this rate is now ₹65.5 lakh, of which the interest component will be ₹35.5 lakh – more than the total principal amount.”

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Home loans are structured such that the payments in the early years are mostly interest. When more of their payment is going to interest rather than principal, it will take longer for home buyers to build equity and own more of the home. It also means that they have a reduced opportunity to benefit from appreciation if they sell the property, because less principal has been paid off.

It is not a good sign for either individual borrowers or the broader housing market if interest on home loans exceeds principal. This would need to be addressed in the next Union Budget or even earlier via a focused policy intervention, so that the affordable housing segment is not derailed further.

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Sales numbers across the top seven cities can improve which has consistently been falling ever since the pandemic. According to latest Anarock Research, the total sales share of affordable homes went down to about 20% in H1 2023, against 31% in the corresponding period in 2022.

Of the total 2.29 lakh units sold across the top seven cities in H1 2023, just 20% or 46,650 units were affordable homes. Back in H1 2022, of about 1.84 lakh units sold, over 31% or 57,060 units were in the affordable category.

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To fulfil its vision of ‘housing for all’, the government must make affordable housing more viable for the maximum number of buyers. It is, after all, this segment that has the maximum demand in the country. In the current urban housing shortage of 11.2 million units, affordable homes priced <₹40 lakhs account for over 80% of the shortfall.

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