Housing loan interest rates dipping in past few months.

Lower interest rates and stagnant property prices, in combination with the interest subsidy under the Pradhan Mantri Awas Yojana (PMAY), have markedly improved the economics for home buyers, bankers say.

With interest rates falling about 200 basis points (one basis point is equal to 1/100th of 1%) in the last 15 months, EMIs (equated monthly instalments) for small and medium ticket home loans in some cases have fallen below the rent paid for the same property.

According to bankers, for a home loan of ₹25 lakh, when the current interest rate of 8.5-9% is coupled with the subsidy benefit under the PMAY, the real interest rate for a home buyer with an income of ₹12 to ₹18 lakh per annum works out to just 4%, after adjusting for tax benefits. The subsidy amount would be higher if the income is lower.

“Housing loan interest rates have been going down the past few months. While the trend may not continue at the same pace, the reduction in interest rates, in combination with the credit-linked subsidy scheme, has certainly changed the economics guiding the home buying versus renting argument,” says Rajiv Anand, executive director, Axis Bank.

The PMAY is available for first time home buyers with a family income up to ₹18 lakh and for property size up to 110 square metres (1,100 sq. ft. carpet area).

Mr. Anand says that sales in the last few months have also been disproportionately skewed towards the affordable housing segment, which grew by 31% quarter-on-quarter in the January-March period of 2016-17.

“For buyers whose household income is not more than ₹6 lakh per annum and who are, therefore, eligible for the 6.5% interest rate subsidy under the PMAY, this is clearly the right time to consider buying a property by availing of a small ticket housing loan,” he notes.

Real estate prices

Since real estate prices have not moved up in the last few years, the rental yields in properties across cities have stayed flat, hovering between 2.5% to 5%, with an average of around 3.2% in urban markets.

Keki Mistry, vice-chairman, Housing Development and Finance Corporation (HDFC), the country’s largest mortgage financier, says both the interest rates and property prices are favourable for buyers.

“Interest rates are not the only aspect. Property prices have not gone up in the last 2-3 years. This is the best time to buy a property. You should not look at interest rate in isolation. There is a government subvention scheme that you get today. You have to look at interest net of tax benefits, that is, the net outgo,” Mr. Mistry tells The Hindu. “