For some years, we’ve been seeing a slowdown in the real estate sector, symptomised best by mounting inventories around the country. The slowing down of credit in 2019 didn’t help the real estate industry either. But there’s one positive story emerging. In compiling BankBazaarMoneymood 2020, our annual report on how India borrowed the previous year, we saw that more preferred taking smaller home loans. Of all the home loan applications we received in 2019, 72 per cent were for loans under Rs 30 lakh.The corresponding percentage for 2018 was 64 per cent.
The increasing preference for smaller borrowings indicates an inclination for smaller homes and a receding demand for premium apartment. This demand is coming from first-time homebuyers. It tells us that despite the prevailing economic conditions where credit and liquidity are squeezed, Indians are in no mood to give up on their life aspirations such as owning a house. Instead of giving up on the goal, they are approaching it pragmatically. They’re saying, “Let’s start small, secure the benefits, and upgrade when the time is right.”
Moreover, in the light of the new tax regime announced in the Union budget, taking a home loan is now even more important to those seeking deductions necessary to remain in the old regime. Let’s look at the various benefits of owning budget homes.
If your gross income is Rs 20 lakh or less, you should aim to secure 20 per cent deductions under various sections of the Income Tax Act. This way, your tax dues would be lower compared with the new tax regime where you can’t claim deductions. Large deductions are possible through a home loan.
A person with a home loan is eligible for two deductions: up to Rs 1.5 lakh under Section 80C for the principal repaid and up to Rs 2 lakh under Section 24B for the interest paid.
In 2019-20, eligible borrowers have got one more deduction of up to Rs 1.5 lakh on the interest component under Section 80EEA over and above the Section 24B limit.
However, this new deduction is available only to first-time homeowners whose loans have been taken either in 2019-20 and 2020-21 for a property whose stamp duty value is no more than Rs 45 lakh and whose carpet area does not exceed 645 square feet in metros and 968 square feet elsewhere. Section 80EEA benefits have now been extended to the 2020-21 financial year as well. Therefore, eligible borrowers can deduct a maximum of Rs 5 lakh in a year under these three sections.
Cheaper to buy & maintain
A budget home is easier on your pocket. If the basic cost of the home is low, the other assorted costs of homeownership — GST, electricity and water connections, amenities, stamp duty, and registration charges — will also be lower in comparison to bigger properties.
Your downpayment and margin money — around 20-30 per cent of the base cost in most cases — will be lower and, therefore, more affordable.
On smaller homes, it’s possible to get a higher loan-to-value (LTV) ratio, which is the percentage of the total cost a bank is willing to finance.
For larger loans, the LTV is often capped at 75-80 per cent. But for smaller homes, some lenders can go even up to 90 per cent, which means fewer out-of-pocket expenses for you. Also, property use and monthly maintenance costs, which are often linked to your carpet area, will be lower compared with bigger properties, which means your long-term expenses will remain low.
Borrow less, save more
This is key. Buying a small home means borrowing less. This is especially useful for salaried people in their 20s. Their incomes are low now and will increase with time, but their EMIs will remain the same. This would allow them to pay off their debts sooner and enjoy EMI-free, rent-free lives.
Experts advise that you should spend not more than 35-40 per cent of your take-home pay towards all your EMIs. Going above that limit could cause financial stress and even default. So, when your home loan borrowings are small to start with, your EMI pressure would also be manageable and continue to drop as your income grows. This would free up more of your income to be used for various other life goals and pursuits.
According to an aspiration index survey, apart from homeownership, the goals that Indians consider the most important are funding their children’s future needs, maintaining healthy relationships, enjoying good health and becoming domain experts. With lower borrowings, they'll find plenty of liquidity to pursue these aspirations.
Lowest interest rates
Small home loans enjoy the lowest interest rates. For example, the SBI’s lowest home loan rates right now begin from around 7.9 per cent for loans under Rs 30 lakh, going up to 8.55 per cent for loans above Rs 75 lakh.
The eligibility criteria for smaller loans are also more relaxed in comparison to big-ticket loans. This means there may be fewer requirements from the lender for having co-borrowers and loan guarantors. As such, from 2019, banks started linking the home loan interest rates to external benchmarks such as the repo rate. This would guarantee borrowers better transmission of RBI-mandated rate cuts and so interest rates should remain subdued in the near future.
Scope for women
Women have been taking bigger home loans than men. The national averages for home loan ticket sizes in 2019 were Rs 25.64 lakh for women against Rs 23.66 lakh for men, according to the Moneymood findings. In Calcutta, women borrowed Rs 20.38 lakh on an average against Rs 18.08 lakh by men.
Budget housing schemes are giving working women an opportunity to get cheap loans along with tax benefits and credit subsidies.
Homebuyers can take their pick from a burgeoning inventory and in due time sell their first house and upgrade to a bigger one. A small-sized home is ideal for small families who want to create an asset with minimal financial stress. They can consider it a stepping stone into a better life.
The writer is CEO, `BankBazaar.com`