20 Percent Rise in EMIs Derails Affordable Housing

In view of rising   home prices and high interest rates, the buyers of affordable homes are experiencing pain with a 20% increase in their EMIs. As a result of this affordable home buyers are increasingly shying away from buying properties. This has in turn severely hit the demand sale of affordable housing.

A recent report by Anarock finds that the share of affordable housing in overall sales in H1 2023 shrunk to approx. 20% , an 11% decrease against the corresponding period in 2022. Likewise, in the top 7 cities, this segment’s share in the overall housing supply in H1 2023 plunged to 18%, against 23% in H1 2022. The sales have also been consistently falling – the affordable housing sales share has dropped from 31% in H1 2022 to 20% in H1 2023. The 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 INR 30 lakh have jumped up from 6.7% in mid-2021 to nearly 9.15% today. According to Prashant Thakur, Regional Director & Head Research, Anarock Group ,home loan borrowers who were paying an EMI of approx. INR 22,700 in July 2021 are now paying approx. INR 27,300 today – an increase of approx. INR 4,600 per month. This 20% increase in the EMI has resulted in a jump of approx. INR 11 lakh in the overall interest component – from approx. INR 24.5 lakh interest payable in 2021 to approx. INR 35.5 lakh today.

The total interest payable over a 20-year tenure is now more than the principal amount. If a buyer seeks to buy a property of less than INR 40 lakh, factoring in the LTV (Loan to value) ratio, the total borrowed amount is INR 30 lakh for a tenure of 20 years. In this scenario, the buyer would have paid an EMI of INR 22,700 in 2021, when the interest rates stood at approx. 6.7%.

“At this rate, the total repayment to the bank was approx. INR 54.5 lakh, of which the interest component was approx. INR 24.5 lakh – less than the total principal amount, Today, when home loan interest rates hover at around 9.15%, this buyer’s EMI is approx. INR 27,300. The total repayment to the bank at this rate is now approx. INR 65.5 lakh, of which the interest component will be approx. INR 35.5 lakh – more than the total principal amount, according to Thakur.” This bodes ill for the growth of affordable housing and the success of ‘Housing for All’ , as the maximum demand  fis in affordable housing category.

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 and the purpose of well- meaning policy of ‘Housing for All’ is achieved.