– RBI’s repo rate dictates the prevalent interest rates on loans
– The repo rate has been increased after four years by RBI
– CLSS subsidy under PMAY makes the home loan more affordable
Affordable housing is now slowly becoming a reality, thanks to the Pradhan Mantri Awas Yojana (PMAY 2019) scheme launched by the government. The scheme aims to provide a roof over the head of every Indian family by the year 2022 – the year in which India will celebrate 75 years of independence. The target group for this initiative is the financially weaker sections of the population such as the Economically Weaker Section (EWS), Low-Income Group (LIG) and Mid-Income Group (MIG).
One of the main components of the PM Awas Yojana scheme is the Credit-Linked Subsidy Scheme (CLSS). In this, the government provides subsidy on home loans for construction, purchase of property for first-time buyers in the urban market. The subsidy can help buyers save interest amount that ranges from Rs. 2.30 lakh to Rs. 2.67 lakh, depending on the group that an individual falls in.
The interest rate levied by banks for any type of loan is dictated by the repo rate that is set by India’s central bank – the Reserve Bank of India (RBI). The repo rate is the rate at which the RBI lends money to banks. It has been increased by 25 basis points after four years and now stands at 6.25%. The increase in repo rate will directly impact the borrowers, as banks will start increasing interest rates on loans as a response to the move.
So, how will this increase impact the PMAY scheme? Let’s take a look.
The Impact of REPO Rate Increase on Home Loan
There is no ambiguity on the fact that the increase in repo rate will increase the interest rate on home loans. For example, if there is a home loan of Rs. 30 lakh that was taken for a tenor of 20 years, with the assumption that the interest rate was 8.45%. Then, the EMI would come up to Rs. 25,939.
Post this rate increase by RBI, the interest rate now applicable will be 8.70%, which will result in the new EMI amount being Rs. 26,415. It means that an increase of just 25 basis points will result in the increase of the home loan by Rs. 1,14,240 over a 20-year period.
The benefit offered by CLSS
Credit Linked Subsidy Scheme (CLSS) offers an interest subsidy of 6.5% for individuals falling under the EWS and LIG category. The rate of subsidy is reduced to 4.00% and 3.00% respectively for those coming under the MIG1 and MIG2 categories.
Whoever is eligible and applies for housing finance under the PMAY scheme will still be able to avail the subsidy offered, despite the increase in repo rate by RBI. Due to CLSS, borrowers who have opted for this benefit will be able to save an interest amount through subsidies of Rs. 2.67 lakh (for EWS and LIG), Rs. 2.35 lakh (for MIG1) and Rs. 2.30 lakh (for MIG2).
More revisions by RBI
On one hand, the RBI has increased the repo rate which will make loans costlier, but on the other, it has also revised the housing loan limits for Priority Sector Lending (PSL) eligibility from Rs. 28 lakh to Rs. 35 lakh for metropolitan centers. The limit has also been revised for other centers (having a population less than 10 lakh) from Rs. 20 lakh to Rs. 25 lakh.
This has been done with a view to boosting low-cost housing for population falling in the EWS and LIG category. This move coupled with the subsidy benefit offered by pradhanmantri aavas yojna 2019 will help first-time home buyers looking to buy properties in the affordable segment.