Affordable home buyers suffer most, EMIs up 20% in just last two years

The share of affordable housing in overall property sales in the first half of 2023 shrunk to approximately 20 per cent - an 11% decrease against the corresponding period in 2022 as home buyers of this category have seen their EMIs shoot up 20 per cent in the last two years, reveals a report by Anarock. 

The floating interest rates for home loans up to Rs 30 lakh have jumped up from 6.7% in mid-2021 to nearly 9.15% today.

What is Floating Rate of Interest?

The Floating Rate of interest is when the interest rate changes over the course of the loan opted for. These changes occur due to the difference in Market rates. This is also known as ‘adjustable rates’. 

Banks commonly use the repo rate as an external benchmark to link their floating-rate home loans. Therefore, the increase in repo rate has increased home loan rates. Consequently, banks have  in the last one year increased the loan tenures or the home loan equated monthly installments (EMIs).

How are floating interest rate and repo rate linked?

"If you opt for a home with a floating rate of interest, remember that the loan is associated with a Bank’s benchmark rate. This rate moves according to the market interest rates. The interest rates are reset at specific intervals and could vary from calendar periods. Calendar period would mean 3 or 6 months. If the base rate is revised in an upward or downward direction depending on market conditions, the floating interest rate will be revised accordingly," according to personal finance startup Fincap.

 Interest rate growth reflects RBI repo rate hike of nearly 250 bps (from 4% to 6.5% as on date), showing direct correlation between repo rates and floating home loan rates.

Why has demand for afforable housing loans dipped?

Given that the higher rates would impact low-income borrowers more than their wealthier counterparts, demand for affordable housing loans has dipped more. Fewer customers are taking out loans to buy  affordable homes after several back-to-back interest rate hikes.

Data analysed by SBI Research had shown that home loans of up to Rs 30 lakh formed 45% of loans disbursed between January and February, down from 60% between April and June 2022.

In India, there is a high demand for affordable housing, and many buyers in this segment rely on financing from banks or housing finance companies to purchase their houses. 
 

"When interest rates go up, a borrower’s loan eligibility may fall. For example, assume your loan eligibility basis your income was Rs 30 lakh last year with the rate at 6.5%. Assuming your income and eligibility haven’t changed, with the rate at 9%, you can now borrow only around Rs 25 lakh, which is 17% less than last year," said Adhil Shetty, C EO of BankBazaar.

 But in the interim, housing prices have also gone up. And since there is high price sensitivity in affordable housing, having a lower loan eligibility can be a problem. It means the buyer has to cough up more out of pocket.

Home buyers paying EMI of approx Rs 22,700 in July 2021 now shelling out Rs 27,300 - up by Rs 4,600 per month

Home loan borrowers who were paying an EMI of approx Rs 22,700 in July 2021 are now paying approx Rs 27,300 today - an increase of approx Rs  4,600 per month.

Overall interest amount up by Rs 11 lakh in the last two years

"This 20% increase in the EMI has resulted in a jump of approximately Rs 11 lakh in the overall interest component - from Rs 24.5 lakh interest payable in 2021 to Rs 35.5 lakh today," said Prashant Thakur, Regional Director & Head – Research, ANAROCK Group.

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 <Rs 40 lakh, factoring in the LTV (Loan to value) ratio, the total borrowed amount is Rs  30 lakh for a tenure of 20 years. In this scenario, the buyer would have paid an EMI of IRs 22,700 in 2021, when the interest rates stood at approx. 6.7%. 

“At this rate, the total repayment to the bank was approx. Rs  54.5 lakh, of which the interest component was approximately Rs 24.5 lakh - less than the total principal amount,” said Thakur.

“Today, when home loan interest rates hover at around 9.15%, this buyer's EMI is approx. Rs 27,300. The total repayment to the bank at this rate is now Rs 65.5 lakh, of which the interest component will be Rs 35.5 lakh - more than the total principal amount.”

What this means for the home loan borrower

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," said the Anarock study.

 According to latest ANAROCK Research, the total sales share of affordable homes went down to approx. 20% in H1 2023, against 31% in the corresponding period in 2022. 

Of approximately  2.29 lakh units sold across the top 7 cities in H1 2023, just 20% or approx. 46,650 units were affordable homes. Back in H1 2022, of approx. 1.84 lakh units sold, over 31% or approx. 57,060 units were in the affordable category.

"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 approx. 11.2 million units, affordable homes priced <INR 40 lakhs account for over 80% of the shortfall," said Thakur.