Affordable homes a misnomer? Your home loan EMI has shot up 20% in the last 2 years

• Floating interest rates for ₹30 lakh home loans jumped from 6.7% in mid-2021 to 9.15%.
• For affordable home buyers, total interest payable over 20 years is more than the principal.
• They have less opportunity to benefit if they sell, because less principal has been paid.
  

It’s one thing to buy a home and another to pay the loan installments that come with it. The real estate sector has charted a spectacular recovery in the last two years — with the exception of the affordable housing market. The buyers of homes that cost under ₹45 lakh have been desisting from purchase decisions, making developers go easy on such projects.

“The mounting desolation is not helped by the fact that affordable home buyers have been paying almost 20% more in their 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,” said a report by real estate consultancy Anarock.

The Indian central bank (RBI) has hiked base interest rates by 250 basis points since March 2022 as the economy recovers from the pandemic slowdown.

Now, as interest rates rise, lending institutions also raise rates and thus the interest component of a home/vehicle loan also goes up. For example, if a home buyer borrows ₹30 lakh for a tenure of 20 years at 6.7% interest rate, he would pay ₹24.5 lakh as interest over two decades.

But as the interest rate rises to 9.15%, this total interest repaid over the years would be at ₹35.5 lakh. “The total interest payable over a 20-year tenure is now more than the principal amount. It is not a good sign for either individual borrowers or the broader housing market if interest on home loans exceeds principal,” said Prashant Thakur, regional director and head of research at Anarock group.

Homes as an asset generally lose their attractiveness in such a scenario. 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,” Anarock explains.

As expected, affordable home sales have been slumping in the last few years. The share of affordable homes in total sales went down to around 20% in the first half of 2023, against 31% in the corresponding period in 2022 — as per data from top seven cities in India.

With a vision of ‘Housing for All’, the Indian government has set up the Pradhan Mantri Awas Yojana (Urban) Mission in 2015 to address the shortage of housing among the middle and lower income groups.

The segment has the most demand for housing, and has the maximum potential buyers. As per Anarock data, such homes are in shortfall too. In the current urban housing shortage of approximately 11.2 million units, affordable homes priced ₹40 lakh account for over 80% of the shortfall.