Interest subsidy on Home Loans
By Joseph Samson
Dec 1, 2008
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With the aim of boosting demand in realty sector, the government is planning to introduce an interest subsidy in home loans that will make home loans cheaper for the customers.

The real estate sector which has spill over effect on many industries like cement and steel is likely benefit by this move. Under this proposal loans will extended below market rates to real estate developers. However there will some restrictions on disbursed amount like upper ceiling on selling price of flats and individual homes. The starting limit for the loans is expected to lie around Rs 10 lakh as it is been found that 75% of homes loans are below Rs 7.5 lakh.

Also there are some eligibility criteria for such loans. Only developers who are in the mid-way of a housing project or have land in their possession will be extended these loans. Even an individual constructing a home is eligible for the subsidy, said a government official.

The urban development ministry has been directed by the board of secretaries headed by Finance Secretary Arun Ramanathan to set up a report on the issue and present in front of the apex committee headed by Prime Minister Manmohan Singh. The apex committee will take the final decision on the proposal.

A senior official from the government said, "Discussions were held on this proposal which includes making available loans at around 8 percent interest rate, which could remain fixed for a period of around five years. The government will pay for the balance interest amount."

In the past one year, interest rates in the Indian market have been soaring high and the prime lending rates of some banks have even crossed 14% as compared to 9%, a year ago. This was the major factor for a fall in demand as home buyers postponed their purchases along with increasing the loan repayment amount.

In order to avoid defaults following the crisis, credit worthiness of borrowers is been assessed by most banks. The move is been taken to ensure that demand in the industry does not fall. "If the housing sector does not kick off in the next two to three months, it could have a domino effect. Currently, most housing projects are stuck because of the liquidity crunch. A boost to this sector will mean additional demand for cement, steel and other material, which is likely to stimulate the economy. Moreover, it would also ensure that jobs in the sector are not lost," said the sources.

Analyst report that around 80% of the total real estate demand comes from the housing sector and a move like this will certainly help in enhancing the demand in the real estate sector.

Recently Karnataka Government has also announced a subsidy in the education loans.


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