Why affordable housing can be first-time homebuyers’ go-to option in 2020

Bigger the better? Think again! When it comes to buying a home, the trend is changing as an increasing number of homebuyers now want to buy budget homes. Be it people not keen on taking heavy home loans in a slowing economy or them finding it difficult to buy, maintain or even sell an expensive property -- there could be many reasons fuelling this trend.

In fact, according to BankBazaar.com’s Moneymood 2020 report,

loans under Rs 30 lakh constituted a whopping 72 percent of the total number of home loans applied for in 2019. This spurt was fuelled largely by first-time home buyers.

First-time home buyers have several limitations, the prominent ones being difficulty in arranging the down payment and low repayment capacity. However, if first-time homebuyers make their move to buy their home in 2020, they can overcome many such limitations and avail lots of benefits. Let’s discuss a few reasons why affordable homes should be their go-to option this year.

Most banks and financial institutions levy a lower rate of interest on home loans below Rs 30 lakh. Banks usually allow a loan-to-value (LTV) of around 85 percent for buying a home, so you can buy a home of around Rs 35 lakh value to enjoy this benefit. The interest rates on an affordable home loan are usually 0.1 percent to 0.25 percent lower than other home loan segments.

On top of that, banks are currently offering record-low interest rates following the RBI’s directive in October 2019 asking them to link the lending rates of their floating rate loans to an external benchmark like the repo rate. The central bank cut the repo rate by 135 basis points in 2019 alone and it now stands at 5.15 percent, and banks are transferring the benefits of a low repo rate proactively in this new external benchmark-linked loan regime. Besides, borrowers with high CIBIL scores and women are getting preferential rates in the new loan regime. Hence, it’s a good time to take the plunge from the perspective of home loan rates.

 Building budget homes has been one of the primary focus areas for India’s realty sector for a while now, perhaps to be in line with the government’s ‘Housing For All By 2022’ vision. This has led to a major boost in the supply of affordable properties throughout the country. At the same time, several developers are sitting on large housing inventories due to subdued demand from buyers because of the economic slowdown and credit crunch. However, all this makes it a great time for aspiring homebuyers to negotiate with developers to get the best offers. They can either get discounts on the property or a house in their preferred location if they negotiate well in this buyer’s market.

It’s easier to repay a small loan. Plus, the out-of-pocket expenses like down payment, registration and stamp duty charges among a host of other miscellaneous expenses are lower for an affordable property. Also, if you buy an affordable home on loan, you can avoid loan default and clear the debt in a much shorter tenure. Banks look for a high repayment capacity and may ask you to add a co-borrower before sanctioning a big loan amount. For an affordable property, on the other hand, you may find it easier to fit into the bank’s eligibility requirements and get the loan quickly.

Lastly, when you opt for an affordable home and take a loan that’s lesser than your actual borrowing capacity, you can use your remaining borrowing power to accomplish other financial goals or as a tool to face financial contingencies.

The regular tax deduction benefits allowed in home loans are under Section 80C and Section 24, but the government has announced another tax deduction benefit under Section 80EEA for affordable homebuyers who get their loans sanctioned before March 31, 2020.  First-time homebuyers can avail extra tax deduction up to Rs 1.5 lakh on interest payment (over and above tax deduction of Rs 2 lakh under Section 24B) if they meet the eligibility requirements.

The 80EEA benefit could lead to an additional tax deduction of approximately Rs 7 lakh (which could translate to actual tax savings of over Rs 2 lakh if you’re in the 30 percent slab) in 7 years if you buy a property worth Rs 45 lakh with 80-85 percent LTV at 9 percent interest and a tenure of 15 years.

Do note that this benefit is available only for first home buyers, for a property value not exceeding Rs 45 lakh (as per stamp duty payment), and carpet area up to 645 and 968 sq.ft for metros and other places, respectively. Check the other eligibility criteria to avail the tax benefit under this section.

Under Pradhan Mantri Awas Yojna (PMAY), the government is allowing a credit-linked subsidy scheme (CLSS) benefit to the first-time homebuyers. The criteria to avail the benefit are that the loan should be sanctioned before March 31, 2020, and the buyer shouldn’t already own a pucca house. Under this scheme, the first-time homebuyers can get the upfront interest subsidy up to Rs 2.67 lakh if they meet the eligibility requirements pertaining to the borrower’s annual household income, location and carpet area of the house, etc.

This scheme is targeted especially for the affordable homeowners, so you must not miss out on the opportunity to buy your home early in 2020.

If you are planning to buy your first home, you should ideally start preparing yourself in advance. One of the first things you should work on is to improve your CIBIL score by clearing all your exiting EMIs and credit card payments as a score above 800 can help you get preferential rates in the new external benchmark-linked loan regime. And because lenders have been mandated to revisit the rates of these repo-linked loans at least once every quarter, borrowers would be well-advised to regularly check their CIBIL scores as even a temporary dip may lead to higher rates until the score improves.

Also, try to clear your outstanding loans before applying for a home loan as that would boost your repayment capacity. While buying a home, perform strict due diligence, check the location of the property, verify the developer’s background, and compare different loan offers to find the best deal. Moreover, you may want to prefer a ready-to-move-in property over an under-construction house to minimise risks. Lastly, if you have any confusion or doubt, don’t hesitate to consult a property advisor for help.